The Bags have unlimited space currently. Assuming you are using a mouse you click on an item to select it, and then click on the spot you want to move it to. You can move to the other Bags on the right, or the Belts on the left side. We plan to add a tutorial to the inventory screen, but for now you can click on the Help button for a text description of the basics.
We do have the early game difficulty favoring the player to allow easier experimenting and testing, but we may have gone too easy on it. As you progress enemies have more armor and defenses making which item you use more important. The loot does change as you progress, leveling up as you and the enemies do. The art is not as clear between different level items of the same type, and we plan to do an art overhaul to fix this.
Thanks for playing, and the feedback!