Rotate or replace tires
Rotating tires on a car is usually done to even out the wear (unless you have specific front / back / left / right tires) across the tread - they'll often wear on the outside of the tread, so rotating them presents fresher tread to the gripping surfaces (i.e., they're wearing at the places that make the most contact with the road).

With a bike tire you shouldn't run into this problem (unless you make a lot of left turns, or a lot of right turns). "Rotating" in this case means moving the less-worn one (front tire) to the position where it'll get more wear (to the back) and replacing the more-worn one in the position where it'll get less use (to the front). This means you don't have to buy 2 tires when one gets worn (just one).

A couple of observations. If you play games with your tires (e.g., stickier front tire, deeper groove on the rear, etc.) you should obviously replace the tire with one with similar characteristics, so you won't be able to swap them around.

Typically, one replaces a tire when it either has a huge gash or has worn down to the point where there's a significant decline in the performance (i.e., no tread left or it's about to blow). If you're using knobby tires and you're wearing the nubs down you're correct in that they'll take on the characteristics of road slicks. 

It's not necessarily "bad" to rotate them; if you can only afford one tire or the other one is perfectly good it means you can continue to ride without having to miss meals or rent payments. If you're still able to maintain the needed grip throughout your ride (road and gravel) there's no real reason to replace them if they're just a little worn. If, on the other hand, you're starting to have difficulty with traction, control, leaks, etc. it might be time to replace them.

An alternative to "rotating" your tires would be to buy a new set (if you can afford them) and save the less-worn of your two existing ones as a spare just in case you run over a chunk of glass or something.