I do think Picard is probably making a point, in which he's really saying "Okay, yes, we *are* a military organisation, but haven't we outgrown all this battleships stuff?"
That would be like the United States saying, "haven't we outgrown having a military?". The problem with Star Trek is that it creates an attitude toward military defense that is not in line with the universe they have created, with Klingons and Romulans and Cardassians and Borg and Dominion. It's a galaxy that is very much like our own world with so many nations willing to wage war against their neighbors. It would be one thing if the galaxy in general was as 'utopian' as our Earth, but it clearly is not.
The Starfleet model simply does not fit for the kind of defense the Federation needs with all the threats in the galaxy.
I don't disagree, and I actually think if that's the point Picard was trying to make, then he's clearly wrong.
The Federation was supposedly in a state of war with the Cardassians in the first two seasons of TNG anyway, so really Picard might have the moral high-ground, but you have to wonder what rock he'd been hiding under.