Ambient occlusion (as the term is typically used) is a way to approximate local reflection of uniform inbound (aka ambient) light. It does this by measuring how much of the exterior environment is visible at each point, as a way to modulate an ambient lighting term.

It doesn't really simulate how light bounces locally around an object, nor light emitted by an object. Rather than a light transport simulation it's more of a clever CG approximation hack that looks great and is pretty cheap.

But to the real point I think you were trying to make: yes, there have been a lot of strides in simulating light since the 70's, and more advanced techniques exist that should give more accurate results.

Yeah, I'm not sure that Phong Shading is really the takeaway here. It seems that it's more like they went from a local "illumination" technique to a full global "illumination" technique to take into account secondary bounces.