It didn't really work because the economy was fucked up at other other possible point (the crates of loot from smuggler caves scales absurdly well with the player's level, it doesn't require much barter skill to sell an item to a vendor for more than you just bought it for, alchemy making valuable potions from cheap food, soul gems being worth an absurd amount when filled, etc.), but in Morrowind the majority of enemies used "low quality" (my designation. Includes iron, netch leather, fur) gear, where any PC who had cleared the starter dungeon would have "normal quality" (steel, chitin etc.) and have no use for it. This low quality gear had absurdly bad weight to value ratio and simply was never worth it to carry back to a vendor to sell unless the distance was super short (like the starter dungeon, or the occasional time you fight hostiles within a town) so the player wouldn't bother. Instead the player would be looking for small, valuable items like imported alcohol, jewelry, gems, magic scrolls, and (if they knew how to find a buyer) illicit drugs all of which were meant to be converted to cash at vendors and were (theoretically) there wasn't that much to find. This way the area designers were free to include enemies who were tough due to their numbers, skill and occasionally spells instead of equipment and not have to worry about the excess loot.
One interesting money sink that pops up occasionally, but not often enough, is real estate. If the player is going to be going back to an area regularly (as opposed to plot progression making backtracking impractical or impossible), and doesn't already have some form of transport that doubles as a home (such as a ship) it's an easy enough thing to implement a house or two for sale, it makes sense to be a thing, and makes sense to be expensive. Players will take it because it's a logical place to stash their stuff they might need (but won't), even if it doesn't have elaborate upgrades or utility items.
