Do Grades Hurt As Well As Help the Educational Process?

It's early in the semester and grades and grading does not yet have the bite it will have later, so this distance may allow for some more open minded consideration. For the project on Maria Montessori that I've been working, I came across this passage:

We know only too well the sorry spectacle of the teacher who, in the ordinary schoolroom, must pour certain cut and dried facts into the heads of scholars. In order to succeed in this barren task, she finds it necessary to discipline her pupils into immobility and to force their attention. Prizes and punishments are ever-ready and efficient aids to the master who must force into a given attitude of mind and body those who are condemned to be his listener.

Are grades an artifact of a failed pedagogy? Do we need grades to force students to do a minimum amount of work because we suck at teaching? At the college-level, we are all technicians driven in our fields because we are enamored to point of obsession with what we study. Are we really that bad at motivating the questions that enthrall us?

Montessori takes it one step further and says that grades may create a floor, a lower bound on what people learn, but it also creates a ceiling, an upper-bound beyond which most intellects will not pass. We shape our students not to be intellectuals with creative and rigorous minds, anxious to ponder the deep and pressing questions of our time or of the ages, but rather docile bureaucrats who only work for promotion, uncaring about what their work really means:

Something very like this condition of the school exists in society, in the relation between the government and the great numbers of the men employed in its administrative departments. these clerks work day after day for the general national good, yet they do not feel or see the advantage of their work in any immediate reward. That is, they do not realise that the state carries on its great business through their daily tasks, and that the whole nation is benefited by their work. For them, immediate good is promotion, as passing to a higher class is for the child in school.

I find my students to be incredibly risk averse. If you give them an assignment, most will take no chances that might stretch them if it means possibly receiving a lower grade. They use a game-theoretic calculation to make sure they get the sure B instead of trying something that might help them grow, something that might engage their creativity, something that might allow them to transcend their intellectual place. We learn so much through trial and error, but the grade-based approach to education punishes error making that type of learning which is the most vital turn out to be irrational. The grades seem to act as an anchor that keeps them from achieving all they could. As Hanno is fond of saying about natural selection, it isn't survival of the fittest, it's survival of the just good enough. Isn't this also what our test-obsessed, grade-based picture of education gives rise to?