Why do profs supervise PhD students not smart enough to ever be peers?

Smart is a very vague criterion. What you need is people curios and intelligent enough to be able to do independent research and It's very difficult to judge whether someone would be a good scientist before trying them with real PhD work. This process takes years so there's no way to judge how smart or successful a PhD student will be. The master's work can give a hint of how serious the student is but it's not enough because it doesn't require the same degree of independence as a PhD.

This is really going to be university/department/situation dependent. Unless you are a professor at a top school/department you likely are not going to have highly qualified PhD candidates lining up to to research with you, most professors have to just take what they can get. Unless a PhD candidate is truly disastrous I believe the professor still gets way more benefit than the stipend is costing them.

> PhD students not smart enough to ever be peers?

What is your method to determine this? Especially at the beginning of a students >= 5 year journey to earn a PhD?

If you are a professor you are (1) really good at musical chairs, (2) smart, in that order.

What do you mean?