Arc is not really FP; it just happens to be a descriptive DSL for web apps.
news.arc has its limitations, but it's not because of functional programming; it's because pg tried to do as many things "differently" as possible (in-memory data-store, no "objects", etc.). The goal of news.arc, I assume, was to play with ideas, not to build a website. The website is just a side effect.
I won't debate the merits of news.arc's design, but I will note that not everything is about "building a scalable website". There is more to life than the output of ab.