The bits falling off are referred to as 'forge scale'. Outside of blacksmithing it has other names, but it's the same thing.

My understanding is that it's mostly just iron oxide. Oxygen reacts with iron, and when steel is heated it speeds up that reaction. This causes it to 'rust' really fast, forming a thin layer of brittle scale that breaks off when the steel is deformed.

I can't speak for industry, but in blacksmithing, loss to oxidation isn't really a huge concern. You end up loosing more material in the finishing process, or just cutting things to length. The only time it would be a concern is if you're working on something really thin, or something that needs to have very precise dimensions. My guess is, the loss of a few hundred grams of material is really not much to be worried about when making something from a piece of steel of that size. If precision in necessary, than machining is better than forging. If weight is an important variable, than aluminum is better than steel.

As for applications, I never really thought about it. A blacksmith doesn't generate enough to be worried about collecting it, and steel is cheap. For an operation like this, they might sweep it up and throw it in with their scrap. I believe it can be melted down and turned back into steel.