However, if all of those testing are going to pass their 'test', then what purpose does this alleged test serve that a simple demonstration in front of the same people would not serve?
I agree. That's why Inaba Sensei fails people regularly. I was choked when I failed ikkyu. I mean I screwed some stuff up but it wasn't THAT bad (or so I thought). Sensei said something along the lines of: "You don't understand -- everybody
fails at least one test!"
I recently read on the Kobayashi Dojos website about their recent testing. Kobayashi sensei wrote that the nidan tests were so good that he HAD to fail ALL the sandans. He also wrote something like "good luck next year"! That's what I call pressure.