One of the ways in which most grading systems are fucked up is that there's more downside than upside. One failure cancels out 3 or 4 successes, no matter how great. If a teacher decides that any late work gets a zero, then being half a day late on one paper nullifies several great, on-time papers.

I think it's a vicious cycle. This sort of system is designed to produce the sort of risk-averse rule-followers required by old-style industry: people destined for jobs where creativity isn't required but following orders 90% of the time is failure. But for that system's defense, it's good practice for real life. Humans are vindictive and focused more on stigma, gossip and the aversion to failure than in seeking out excellence and creativity. Hence, they create societies (like our society at a macro level, like most corporations, and like many school systems) that punish failure brutally but don't really value (or even fully trust) excellence, and which actively discourage the risk-taking usually required to excel. (And no, our society's outsized reward for economic fortune is not "rewarding success" since most of those people at the top are effective social climbers or hereditarily-placed parasites.) The "vicious cycle" is closed if one believes that the vindictive, punitive nature of people comes from how they are taught. Or is it innate? I'm really not sure.

The way I think grading should be done is an inverse of the current system. Make the problems really, really hard. Some should be so hard that the hardest exam problems go for years without being answered. Make it so hard that 20% is passing and 60% is exceptional-- instead of 70% being passing and 95% being exceptional-- and so that students are used to it (and therefore they don't panic when they take an exam and can't solve half the problems). I argue for this because the reality for the most creative, hardest-to-get-right pursuits is that for 60% of one's efforts to succeed is exceptional.

All that said, I think grading is important, but it shouldn't be started at such a young age, and that grades should generally be internal (for the student's and school's benefit) only. Many business schools actually prohibit their students from disclosing GPA or transcripts, only verifying which courses were taken and passed. If I were running a college, full transcripts would be available only to academic graduate departments-- not to future employers or professional schools. I'm not going to do their job (sorting) for them.