That generation is headed for trouble:

"Mr Google, I want file X."
"Okay Mr User, which X are you talking about? The contacts on your mobile phone? The contacts you have in Covid hotspots? The contacts in your tablet?"

You do not have to learn the Dewey system (https://en.m.wikipedia.org/wiki/Library_classification) to be able to find a book in the library filed under that system. You need the list of references and the ability to read.

Reliance on search programs to locate lost data is not successful if links or parts of the data is corrupted. At least files and folder use may enable alternative search methodology.

Do people no longer know how to defrag their hard drives?

The problem is the lack of professionalism now inculcated in all. It is like comparing a Chinese barefoot doctor (https://en.wikipedia.org/wiki/Barefoot_doctor) to a Harvard or Guy's Hospital trained doctor. The former is trained to deal with 60% of cases encountered, the latter two 90%.

Humans have been organizing data in one form or another for millenia, long long long before files and folders existed. Our entire intelligence is based on grouping and categorizing everything we encounter.