On OSX, "Built in Mic", "Built in Input", and "Built in Output" all show up as separate audio devices. This means you can only select one, which means you have to choose between being able to record or being able to hear audio.
If I have it set to "<default system device>" it chooses "Built in Output", and no inputs show up as available to record with. But if I select "Built in input" or "Built in mic", I can't get any sound because there is no device selected for output.
As you can see here, OSX lets me independently choose which device is used for input and which is used for output:
The microphone icon means that device is being used for input and the speaker icon means that device is being used for output.
When selecting "<default system device>", can Reaper not just make the same selections as laid out in the Audio MIDI Setup window in OSX? So that way "<default system device>" in my case would mean using the mic for input, and the speakers for output. Currently, Reaper just sets the device to "Built in output", which doesn't include any inputs and therefore won't let me record anything.