It used to be that melee was as good or better than swords or axe. (Daggers weren't around then.) The problem is that if you have someone skilled in unarmed combat and someone equally skilled in knife fighting or longsword, the unarmed guy is screwed. It's entirely realistic.
There should be a way to make melee more attractive, and not just by adding "melee based" weapons (bit of a contradiction in terms, but you know what I mean). Perhaps melee could be trained to a higher level than weapons. There could be some hidden NPC on top of some lonely mountain all by himself, and he happens to train melee fifty levels past what anyone trains swords etcetera. Of course, finding him will be a trick since he's so isolated, and perhaps he won't always be where you left him. And of course you'll need to fetch him some strawberries before you can train with him, and they happen to only grow at the base of the mountain.
