So is Google evil or stupid? Naysayers can't have it both ways.
The reality is that Google is worth nothing without its users. Stop clicking on Google's ads, and the money is gone. If Google were to lose the trust of the general public, for whatever silly reason, the cash cow would run out of milk very quickly as Google users flocked en masse to Baidu
Google isn't the only game in Cybertown, and the company relies on its brand name much the same way that Coca-Cola
For these reasons, quite besides its whole corporate mission and "don't be evil" public stance, Google can't afford to be evil or stupid. The company has to walk a fine line in tricky situations like the Chinese dilemma. It made sense to agree to Chinese demands for a while because of the immense promise of that market. But taking a firm position against inhumane and unethical practices like persecuting human-rights activists through cyberspace is the only option that makes any sense for Google now.
Stop crying about the opportunity cost of losing the Chinese market. Google would lose far more if it didn't stick to its principled guns, now that push has come to shove. One can only hope that the Chinese government will buckle under the international scrutiny brought on by this brouhaha, but I'm not holding my breath.