Is this an effective, if spammy, technique?
Depends on the blogs, If the blogs are unique and has good incoming links, It does transfer those link popularity to the linking sites,
Do Google, Yahoo and MSN recognize and count the links?
Ofcourse yes, I am talking about links in blogs itself not on the links in comments made in blogs,
Is any PR passed?
Ofcourse yes, passes perfectly well depends on the No of outgoing links,
Can it be prevented?
Blogs are all about free speech, All search engines like blogs and it is difficult to prevent big spamming there,
But you should remember free blogs are just like free domains or any other paid network of domains you use, they can be easily registered by anyone but the fact even though you might have 100 blogs all those blogs should have unique incoming links from good blogs or other sites, If the links are made by your own network then it is worthless,
So blogs are just like any other paid or free domains good incomings links to those blogs will transfer the link popularity power to the sites which link from it,
Would any sites which are pointed to by the spammy links be penalized, bearing in mind it is as easily done by a competitor as by a site itself?
Incomings links cannot penalize a site from what I have seen, If google or other search engine ever have 100% proof that you own those blogs and they are used to increase link popularity of your site then they can penalize you,
But for that they need 100% proof since even your competitor can do the same, 99.9% proof is not enough to penalize your site,