Although I understand your points, I disagree that the best system is no ranking. I see that deteriorating into utter chaos in terms of transmission of anything. There must be some criteria or standard to measure progress by. Otherwise, everyone beats to a different drummer. Yes, that occurs now as well with different stylistic interpretations. However, if there is no standard everyone will be going off in different directions and the art will disintegrate.
Have you had any experience with arts with no ranking system? Starting closest to home, koryu did not rank people the way modern arts do. Although they had technical and teaching licenses, there was not necessarily any specific technical testing required. After you learned the techniques to the teacher's satisfaction, he gave you the scroll. To the extent that there were tests to be passed I think they were very different in nature from modern aikido tests: they would probably be something more like going out and challenging someone from a rival school with more experience and defeating him.
Moving a bit farther away, Chinese arts, as far as I know, did not traditionally use any kind of ranking or licensing system at all (I'm not including mass-market kung-fu that has copied the modern Japanese system and replaced belts with "sashes"). Yet they are still around and are very distinguishable from each other. Moving further again, over to India, we have yoga, which also has no ranking system. Now you could say yoga has become a bit chaotic with many people creating their own systems -- some good, some not-so-good -- but the fundamental poses and principles are more similar than different between systems. If you see people doing yoga it's easy to recognize what it is, and if you have enough experience it's also not that hard to tell what styles and teachers they have been influenced by.
The reason these things do not descend into chaos despite not having formal tests is that good knowledge is good knowledge, and if you are a good teacher passing on valuable information then people will preserve and continue to pass that on simply because it is good. I would say that it is better for an art to progress this way than by artificially supporting certain kinds of knowledge over others via forcing people to learn and memorize something for a test. When people are able to try ideas out and compare them with competing ideas, choosing and passing on the ones that work best, an art continues to improve and advance. When people are required by an organization to learn and pass on only those ideas that are officially approved, an art decays and becomes stagnant, as I believe aikido has already begun doing.
Testing has its imperfections but it also has elements of value. Not everyone will agree-I to hated testing in college but it is one way of demonstrating a student's progress.
You can make a good argument that the much of what is tested in college is not useful in the real world anyway. That would be a fun debate but I think it would get way off-topic. In any case, as education progresses (from high-school to college and then to graduate education) it becomes less about rote memorization and recital than about dialog and the ability to formulate and deconstruct ideas. I would also say that the intrinsic value of testing depends a great deal on the subject. If you take a calculus test, you can say that this knowledge is useless because you are not going to become an engineer, but you cannot debate the correctness of the ideas you are being tested on. They are beyond question. I wouldn't say the same thing about most of the material that appears on aikido tests.