First, wool: http://en.wikipedia.org/wiki/Wool
Wool's scaling and crimp make it easier to spin the fleece by helping the individual fibers attach to each other, so that they stay together. Because of the crimp, wool fabrics have a greater bulk than other textiles, and retain air, which causes the product to retain heat. Insulation also works both ways; Bedouins and Tuaregs use wool clothes to keep heat out.
The amount of crimp corresponds to the fineness of the wool fibers. A fine wool like Merino may have up to 100 crimps per inch, while the coarser wools like karakul may have as few as 1 to 2. Hair, by contrast, has little if any scale and no crimp, and little ability to bind into yarn. On sheep, the hair part of the fleece is called kemp. The relative amounts of kemp to wool vary from breed to breed, and make some fleeces more desirable for spinning, felting, or carding into batts for quilts or other insulating products including the famous Tweed (cloth) cloth of Scotland.
Wool fibers are hydrophilic, meaning they readily absorb moisture. Wool fibers are hollow.[4] Wool can absorb moisture almost one-third of its own weight.[5] Wool absorbs sound like many other fabrics. Wool is generally a creamy white color, although some breeds of sheep produce natural colors such as black, brown, silver, and random mixes.
Wool ignites at a higher temperature than cotton and some synthetic fibers. It has lower rate of flame spread, low heat release, low heat of combustion, and does not melt or drip;[6] it forms a char which is insulating and self-extinguishing, and contributes less to toxic gases and smoke than other flooring products, when used in carpets.[7] Wool carpets are specified for high safety environments, such as trains and aircraft. Wool is usually specified for garments for fire-fighters, soldiers, and others in occupations where they are exposed to the likelihood of fire.[7]
Wool is resistant to static electricity, as the moisture retained within the fabric conducts electricity. This is why wool garments are much less likely to spark or cling to the body. The use of wool car seat covers or carpets reduces the risk of a shock when a person touches a grounded object. Wool is considered by the medical profession to be hypoallergenic.<<citation needed
Boiled down, keeps you warm while it is wet. Also, impedes microbial growth (stink), repels liquid and also wicks it. On top of that has fire resistance and, if put together right, is very durable.
Merino Wool is wool that comes from a Merino sheep. These guys are from Australia. Here are characteristicss of garmets made of Merino wool:
Merino wool is common in high-end, performance athletic wear. Typically meant for use running, hiking, skiing, mountain climbing, cycling, and in other types of outdoor aerobic exercise, these clothes command a premium over synthetic fabrics.
Several properties contribute to merino's popularity for exercise clothing, compared to wool in general and to other types of fabric.
Merino is excellent at regulating body temperature, especially when worn against the skin. The wool provides some warmth, without overheating the wearer. It draws moisture (sweat) away from the skin, a phenomenon known as wicking. The fabric is slightly moisture repellent (keratin fibers are hydrophobic at one end and hydrophilic at the other), allowing the user to avoid the feeling of wetness.[6]
Like cotton, wool absorbs water (up to 1/3 its weight), but, unlike cotton, wool retains warmth when wet[7] helping wearers avoid hypothermia after strenuous workouts (climbs) or weather events.[6]
Like most wools, merino contains lanolin which has antibacterial properties.[8]
Merino is one of the softest types of wool available, due to finer fibers and smaller scales.[7]
Merino has an excellent warmth-to-weight ratio compared to other wools, in part because the smaller fibers have microscopic cortices of dead air, trapping body heat similar to the way a sleeping bag warms its occupant.[9]
How do I use it?
I have found that merino wool, and I am also using Smartwool which is merino wool treated with some magic crap by Smartwool, is the best base layer for me. I have been using some long underwear and a tshirt ($70 for the underwear bottoms, $34 for the t-shirt on the clearance rack... lucky) for my outdoor adventures.
These base layers are working so well that my other clothing choices are less important. When it is cold I used to only wear specific pants and some silk long underwear bottoms but now, with the Smartwool undies, I can go out in poly/cotton pants or nylon or whatever and not really worry too much about it.
I need less, as I don't need to change my underwear as often as the Smartwool does not hold a stink. I feel more comfortable too. The stuff is softer than half the cottons out there and just as comfortable if not more so than synthetics. One weekend = just the one Smartwool t-shirt and maybe a spare (synthetic) in the ruck. I am purchasing some boxers next (about $45 at REI for the Smarts).
BTW, I am not endorsing Smartwool, it's just what I own so all I can relate. I bet there are many other manufacturers of just as fancy and expensive underwear made of merino wool.
Speaking of, I have about 6 pairs of REI brand merino wool liner socks. I have been collecting them over the past year and a half, and wearing them in that respective time as my main "office attire" sock. Good sock. I have pretty wet feet and the socks hold up well. The shoes I was wearing are another story though as there was little ventilation in them (Keen Briggs). I have recently drank another koolaid, the bamboo rayon flavor, and those are even better at keeping my feet dry... and another thread. The merino socks are also great as advertised - a liner. My best usage thus far being Wintergeddon; the merino liners and REI rag wool combo was awesome.
Care of merino is also a major factor. Take the above for example, REI merino liners and REI rag wool. You can toss the merino socks into the wash with your KISS t-shirt, boxers, a bath towel and various other common laundry items and it will be fine. I have had zero shrinkage on my merino socks. ONE of my rag wool socks got into the wash last spring and it is nothing but a fuzzy puck right now. It composted excellently.
Well, there you have it, what I know and have expereinced with merino wool stuff. Not as extensive as others but I sure hope I imparted some decnt info for you if you were wondering. It's good stuff that changes how you do things out in the dirt... and expensive as Hell. But as Woodwalker quotes: "There's no such thing as bad weather, just inappropriate clothing". I am fully in the camp of the most important, buyable, piece of gear is clothing choices. A good cap, jacket, socks and boots will go a long way and is your first line of defense agains exposure - the #1 killer of us outside types.
Feel free to share your own expereinces too.
Sadly I only have the midweight long underwear 
I did get it for only $45 though. Yes Merino wool is expensive but it feels so good on the skin 
its only a matter of time until I have a complete collection.
