Getting into these schools is extremely competitive. You have to be at the top of your high-school class, and even that isn't a guarantee. Once you are admitted, you are among the best and the brightest. Sure, there are some "legacy" students that got admitted by family connections. But, most are already "high achievers".
Under those circumstances, you would expect most of the students to excel academically. If you decided to implement a traditional bell-curve, then you might assign 10% to "failing". If everyone effectively aced a test, how do you do that?
I've seen similar issues in a large company. One organization may have very high-performing employees, either due to the culture, leadership, or even because they were acquired in a merger. Another organization is largely "slackers", because their management lets them slide. But, if a company forces each to rank their employees and get rid of the lowest 10%, are they really solving the problem?
RE: Getting into these schools is extremely competitive. You have to be at the top of your high-school class, and even that isn’t a guarantee.
Al Gore? At the top of his class?
Hmmm...
Harvard Business School has (or had, when I was enrolled) only three grades: Excellent, Pass, and Low Pass.
Professors were required to give a Low Pass to the bottom 10% of each class, no matter how highly that 10% actually scored in the class.
Low Passes ("Loops," as a noun, and "Looped," as a verb, as in "Mike Looped Marketing") were counted cumulatively over your four semesters. If you received a certain cumulative number of Loops, then you were dismissed from HBS.
That's one valid argument, but another might be that they have started letting in too many St. Barack-like Affirmative Action quota-fillers whom they don't dare stigmatize with a racist grade like "F".
It would cause Yale no end of trouble if the class had 60% A's and 40% F's, and protected groups made up the entire 40%.
I'll offer a flip-side to your flip-side:
The real value of going to an Ivy League school is that you get to spend 4-years with very bright, competitive, driven students. They will keep you on your A-game. Hanging around smart people always pays dividends.
But that begs the question: Why do you have to spend $60,000 a year just to hobnob with a choice set of peers?
Harvard is a rip-off -- it offers very little except admission to an elite club. After that, as an undergrad, it's really up to you. One can argue that the ROI is worth it (I would not argue that, but someone might) but there is absolute price-gouging going on.