It's weirder than that. If bullying doesn't hurt, then why would anyone do it? Or that might be the wrong question. Why do people torture Sims? They have to know that the Sims can't feel pain.

It's plausible that most bullies don't know how much damage they do, but I don't think that's the whole story.

I think I need a little history here. Have people always said that bullying shouldn't hurt (people being bullied shouldn't show signs of pain), or that a modern development?

I suspect the latter.