In the upper air, do pilots use flaps to generate lift as well slow down an aircraft?
It's a little complex, but here is a shot. Take a look at the following graph:

graph http://www.navlog.net/wp-content/uploads/2012/10/PowerAvailable.png

What you can see is multiple airspeeds. For a plane, the rate of cruise is maximised around Airspeed B is reached- this is when the difference between power available and power required is the greatest and therefore the most excess energy is available for climb.

The slope here indicates how much power is necessary for that airspeed- the steeper the curve, the worse it is. The value is really high for airspeeds all the way to left.

If you were to deploy the flaps, you would sort-of shift the power required curve to left- adding drag, reducing the difference between the power available and power required, reducing the maximum rate and in the process increasing the power necessary. 


(source: ppl-flight-training.com)  

In the equation above, you want to increase lift. Yes, you can do this with flaps- it would increase CL. As you yourself state, it takes a lot of drag to use flaps and slats. Another option is to increase velocity. This is more efficient and uses less energy. 

The reason we need is flaps is since as the velocity drops for landing, we need to increase the CL to maintain sufficient lift for landing. Airspeed for B for landing though is much too fast, so you want to slow down to the left side of the graph. See this post on a little more detail on this relationship.

As for flap limitations, they appear to be 20,000 ft for the Boeing 737- Mostly because boeing found them unnecessary to use at higher altitude.