Technically it's possible, and Windows includes that support for Zip files. You can navigate into Zip file as if it's a folder. For Windows Explorer it does not make any difference.
The real difference comes when you try to open a file from a Zip-folder. It's not a folder after all, so to open a text file in Notepad from Zip-folder, the file has to be extracted to a temporary folder, and only then Notepad would be able to open it. (Notepad does not know how to decompress a file from a zip archive to access it directly.) What if you decide to modify the file and save the changes? Right, the changes go into the temporary file created by the shell extension that tries to present the zip archive as if a regular folder. You would expect the changes go into the original folder, wouldn't you? So the shell extension should take care of that too.
Actually some archivers, WinZip and WinRAR for example, do that. If you open a file from an archive, modify it, they will ask you whether you want to update the file in the archive. (And you have to close the program that opened the file. It's not always convenient in some cases, especially when a program can open several files at the same time.)
When archive is updated, the archiver usually creates a copy and then modifies it. This is done to prevent data corruption or loss: you wouldn't want to lose all your data in archive if an error occurs when it was updated with a new file. If the archive is large enough, updating it would require twice as much disk space the original archive occupies.
So technically it's possible to make a shell extension which would present all, or many, archives to user as a regular folder. But it requires a lot of work. If I'm not mistaken, there were attempts to make it. Perhaps such tools were not popular? Too hard to use, too buggy, too expensive, etc?…
Now that hard drives become larger and cheaper, there's less need to archive data to save space.