Studies show that the pay differential for "all but completed degree" and "completed degree" are stark. Researchers have said that this indicates that a large fraction of the "value" of college is just signalling (intelligence, aptitude, diligence), not education.
If that's the case, many of the students in your post are right -- just giving them the degree could save them (and the school) a lot of time and money. Maybe your art history class is a cost-effective way to get a world class education in late Italian Romantic oil paintings, but as a way of proving you're smart enough to work in a law firm (or even "broaden your horizons and become a better citizen through rounded education") I can't imagine it's terribly efficient.
It's in every student's individual interests for their school's standards for admission and grading to be low, so they can obtain the credential easily.
But it's in the student body's _collective_ interests for the school's standards to be high, so the credential retains and improves its signalling value.
There's a reason a C- student at Harvard doesn't transfer to a deprived community college where they'd be at the top of every class :)
The thing is that most university grading systems have a very high rate of false negatives. For example, in the UK it is rarely possible to retake a course. And this means that messing up a single exam can cause grade problems, even if the material is well understood.
In my experience, exams are often full of ambiguous questions, questions testing knowledge that is not part of the course syllabus, etc.
If the grading was fair, I would agree with you, but it rarely is. And IMO this is what students really hate: they put in a hell of a lot of work. They actually get to grips with the material, and for stupid reasons out of their control they end up with no credit for it.
If that's the case, many of the students in your post are right -- just giving them the degree could save them (and the school) a lot of time and money. Maybe your art history class is a cost-effective way to get a world class education in late Italian Romantic oil paintings, but as a way of proving you're smart enough to work in a law firm (or even "broaden your horizons and become a better citizen through rounded education") I can't imagine it's terribly efficient.