Well, it works pretty well, for children, not so much so for adults, IMO. You have to balance the usefullness of this and any other tool against the rather substantial negatives of the system.
Of course, there are plenty of groups that have gotten by for hundreds of years with very little in the way of ranks, so I don't think that it's a given that Jigoro Kano's system, which is only a few years old, relatively, is the only feasible method of organization.
I may well agree for small self-contained (insular?) groups but any larger; in other words; more than two member/site groups I think a structure naturally occurs with a hierarchy, leadership and a common set of rules, however informal.
IMHO one of the reasons Aikido has spread globally is because there is a formal structure in place. This applies to the Aikikai, Yoshinkan and Tomiki styles equally as well as "newer" groups such as Iwama and Ki Aikido.
I have a lot of sympathy with Yamada Senseis point of view but thnk that, in part, it's a result of the change in authority of the "Uber-Shihan" such as himself and Tamura Sensei who for many years had a reasonably free hand within their own territories and now find themselves rather more constrained by the Aikikai. An inevitable result of time and generational change I guess.