Yale is actually only non-graded for the first two years, then moves to a ranked grading system during the clinical years. This is actually not that different from many schools that have a true pass/fail system for the first two years, a policy that is quite common (Harvard does this, WashU does it for the first year). Heck, Stanford doesn't even rank during their clinical years, for four years of true pass/fail (I say true because most every school is pass/fail at least in name, but many rank you anyway). The schools I've previously mentioned are very research-geared, and engendering a collaborative environment is critical for having productive research taking place, even at the student level. If you dredge up the match list for these schools, you can see it certainly doesn't do much harm to their outcomes (Yale matched 3 into neurosurgery and 3 into rad onc last year from a class of 100, just as an example, to say nothing of the optho/derm/ortho matches).
I personally love the idea of no grades during the non-clinical years. The students by this point know how to study and learn book material; there's no sense in adding the additional stress of grades if you accept the fact that the students can be treated as mature individuals who want to become the best physicians they can, rather than just grubbing for grades. I think having some form of assessment during years three and four is critical, since it is largely a new mode of learning for many students, and much more directly reflects your progress as a developing physician than years on and two.
