"The Handsomest Drowned Man in the World" explores what it means for a person to be great, and what effect such a person can have on those who admire him or her. Admiration can be directed outward, but at some point, the story teaches us, it turns inward, toward the self, and manifests as a desire for self-betterment.
When the villagers admire the drowned man, they are really just projecting onto him the qualities they find to be valuable.