This perspective seems to be absent so far, even though this is a very old question.
To properly credit the source for this idea, the perspective seems to be taken for granted in MacLane and Moerdijk's Sheaves in Geometry and Logic, which was where I was introduced to it.
The observation is the following: Categories are generalizations of monoids, and functors are the correct analog of representations.
The analogy:
This goes as follows. If $M$ is a monoid, we can define a one object category, which I'll also denote by $M$ which has a single object $*$ and $M(*,*)=M$ with the composition coming from the multiplication in the monoid.
Then if $M=G$ is a group for example, then a functor $F$ from $G$ to $\newcommand\Set{\mathbf{Set}}\Set$ is a choice of set $X=F(*)$ together with mappings $F(g):X\to X$ for all morphisms $g\in G$. If we write $g\cdot x$ for $F(g)(x)$, then the equation $F(g)\circ F(h) = F(gh)$ becomes $g\cdot (h\cdot x) = (gh)\cdot x$ for all $x\in X$, $g,h\in G$. This is exactly what it means for $X$ to be a $G$-set.
A natural transformation between two functors $F,F' : G\to \Set$ is a map $\phi : F(*)\to F'(*)$ such that
$g\cdot \phi(x) = \phi(g\cdot x)$ for all $g\in G$ and $x\in X$. So morphisms of functors are $G$-equivariant maps, as they should be.
Replacing the category of sets with any category you care to think about gives the expected notion of $G$-representation in that category.
Back to categories and functors
In this perspective, a covariant functor $\newcommand\C{\mathcal{C}}F:\C\to \Set$ is a choice of set $F(c)$ for all objects $c\in\C$ and a function $F(f) : F(c)\to F(d)$ for each morphism $f:c\to d$ in $\C$. Subject to the requirement that $F(fg) = F(f)F(g)$ when $f$ and $g$ are composable arrows.
We can think about this as a family of sets $X_c$ for all $c\in \C$ such that for $f:c\to d$, and $x\in X_c$, $f_*x\in X_d$ and $g_*f_*x=(gf)_*x$ when $g$ and $f$ are composable.
A natural transformation between two representations $X_c$, $Y_c$ is a family of maps
$\phi_c:X_c\to Y_c$ such that
$\phi(f_*x)=f_*\phi(x)$ whenever this makes sense.
Now the Yoneda lemma becomes the following observation.
The functor $\C(a,-)$ is "freely generated" as a $\C$-representation by $1_a$.
What I mean by this is that a natural transformation $\C(a,-)\to F-$ is determined by the image of $1_a$ and there are no restrictions on the choice of image (except that of course it must lie in $Fa$).
This is because for any morphism $f$, we have
$$\phi(f)=\phi(f_*1_a)=f_*\phi(1_a).$$
The contravariant version is identical, except now we think of functors as right $\C$-representations because contravariance becomes the rule $x|_f |_g = x|_{fg}$, where $|_f$ denotes the action of $f$ on $x$ when this makes sense.
This philosophical perspective is related to Sridhar Ramesh's answer, based on what I can see, but I'm not really familiar with the algebraic theory perspective, and I think this is a bit more of an elementary algebraic viewpoint.
The point here is that you should think of Yoneda functors $\C(a,-)$ or $\C(-,a)$ as the free objects in a single variable supported at an object $a$.