You could produce tracks with some ordinary earbuds. It's just harder to know what exactly is going on in your mixes and whether it will translate well to other listening environments.
It's general there are few things you want out of your listening environment:
- It's nice to have speakers/headphones that are as neutral as possible—there's no such thing as completely neutral. But you don't want a bias in the speaker response or an acoustics problem in your room fooling you into compensating for a problem that might not exist.
- It's nice to have speakers/headphones with that reproduce the full range of your hearing. It's especially tough for small speakers to reproduce bass well.
- Most importantly, you want to know how those speakers or headphones sound. You want to have listened to a lot of music that you consider good or mixes that are considered good so that you have a frame of reference of what "good" sounds like.
Those first two are somewhat linked in that small and/or cheap speakers can rarely do both. So the design of a small consumer speaker might be tweaked to get more bass in a way that hurts accuracy. The third is easier and more desirable with good speakers or headphones but doable with anything.
And there are some other things to factor in:
- The stereo separation is obviously more dramatic with headphones which might make you overcompensate. This is less likely to happen with properly-positioned speakers.
- It's not necessarily just about having one really good listening environment. Many people prefer listening on other things like their crappy car speakers, cheap earbuds, or a mono speaker as a final test to make sure everything translates even on subpar systems.
- On that note, it's also good to listen at different volumes. Does the bass line disappear too much at a low volumes? Does the high end sound particularly harsh or fatiguing when you turn it up really loud?
In short, you want to use different techniques and listening environments to give your mix the best shot at translating well to other environments. But starting from the most accurate reference as you can tends to get you there quicker and easier.
Though when factoring price in, I think you're correct. If I had a budget of say $100-$200, I'd rather get nice set of headphones than the absolute cheapest 4 or 5 inch monitors. With the budget extended a few hundred dollars more, I'd probably rather have monitors.