Part of the core Drupal API (originally part of the forms API, but also used for rendering structured content that isn't a form) is the drupal_render function. This recursively iterates through the element tree, theming the inside of each element based on the #theme property (if present) of that element.
This module registers an 'element' themehook (which because of Drupal's theming system introduces preprocessing hooks and template discovery). Developers can use this hook directly by setting #theme to 'element' or 'element__SOMETHINGCUSTOM' on the desired element, or by defining new themehooks that use 'element' as the new themehook's 'original hook'.
This module is intended to be used as a dependency for other modules or as a tool for developers fluent with Drupal's theming system working on a custom theme. There is no advantage to installing this module unless another module requires it, or you want to use its functionality in creating your custom theme.