Yeah degree inflation is really hard on you if for whatever reason you buy into that. The Meritocracy Trap is a good read if you want to witness the existential horror of someone that realizes it's a thing when they come out on the other side.
I don't know where you're going with "if for whatever reason you buy into that" or whatever.
But it's just mathematics. Normalization, basically. If there are X high school seniors in the country, and Y incoming seats in Stanford's next class, you can't take everyone. So if everyone works harder on their profile it's the same as if nobody does.
I don't think it's in question that this has happened. I would also go a bit further and say that I believe that assembly-lining more "directed" academic effort into every bit of students' time is going to be counter-productive for innovation and creativity, since those are by nature more spontaneous.
The word "meritocracy" itself was invented for a book about how it's a bad idea that can't work, so it's a surprise to see anyone legitimately trying to do it. See: Goodhart's Law.
