The problem with tests and grades is that they motivate students for the wrong reasons. But if students are alienated, the university is not. Grades help keep students in line. Of course you have to rely on students themselves to supply the vicious language and lack of humor, but if you stress them enough, they will. This is why the grade system has increased in importance in the past few decades.
Grades automate the system.
They allow it to be operated as a cheap machine. The grading system replaces caring teachers with the equivalent of a mechanical assembly line. It no longer matters whether a student likes what is being taught, likes the teacher, or even cares. Students must ingest prescribed amounts of knowledge at each station in order to pass on to the next station. It s a mass educational conveyor belt that injects large amounts of technical information into people at very little cost, and best of all it can be run by an absentee management.