On going chinese 6040 problems

[EddyCurrent]

Is it how many steps it takes the stepper to do 1 revolution of the spindle?

Yes, so a setting of 1 will give you the maximum torque, any higher will give you less torque and the reduction can be dramatic. The downside is you will loose accuracy because the smallest increment of the tool is determined by this value. However this is only true up to a point, the greater stability of the motor means there would be fewer lost steps due to the higher torque so a lower setting may increase accuracy, this sounds like it could be the case with your machine and I think you should set the microstepping to the lowest value that is acceptable to you.
If you set it to 1 then the stepper would have 200 steps per revolution, with a ball screw of 5mm pitch the smallest increment would be 5/200 = 0.025mm
It sounds small but if you zoomed in on diagonal cuts it would give you a 'staircase' effect.

Just remember to also set the appropriate 'steps per' in Mach3 so it moves the correct distance.