This is basically how Smalltalks work. In addition to the application, an image will generally include a development environment and all the sources to your application. I think Lisp machine Lisps were a lot closer to this too.
Also the Mesa / Cedar had a similar approach, but based on dynamic libraries, which Niklaus Wirth took great advantage on how Oberon and derived systems worked.
Incidentally, due to Rob Pikes admiration for Oberon, not only had Inferno the ACME editor from Plan 9, already influenced by how Oberon worked, the whole Limbo experience on Inferno is quite similar as well.
Unfortunately we still lack this kind of full stack OS/REPL experience on modern systems.
By all rights, it should have been _awful_. But in reality we were able to iterate quickly and actually make stuff, because the technical foundations of the system were rock solid, the team was good, and because the truly integrated Smalltalk development enviroment enables a super-tight development cycle. A joke I have with a former colleague from those days is how all modern languages are still fundamentally no different from the punch card days: You take your sources off to the batch processing center, and the results come out at the other end, while Smalltalk is future techonology from the 80s.
We do have Pharo, Allegro and such, but their spotlight opportunity is gone.
Do you think the paradigm is a dead end?