The system of elite schools is designed to perpetuate itself -- just like any beauracracy. The elite schools do this fairly well, imho.

Note that grading hard is basically friction in the system that is fairly efficient to avoid.

The elite schools have plenty of smart and hard-working students who don't need hard grading as a motivator to do great work. Those students are the backbone of your school.

Some additional questions after your edit:

1. How does one define the "wrong thing"? Genuine question.

2. What about soft grading makes it a scam? Since letter grades are distinctly not criterion referenced, I struggle to see a strong justification for this claim. Please help me understand.

3. What makes you think that anyone in the system wants it changed? I humbly suggest that very few people actually do -- the current system is super-low friction and allows professors to work on the things that they are actually evaluated on.

I'd say giving one a grade they didn't earn, because it is more convenient for you, is the wrong thing.

It's surely a breach of ethics to evaluate someone's work and report that they did better than you concluded they did for convenience. I'd call that ethical breach "the wrong thing."

OP said to think twice about "honest grading" so I think dishonest grading is the problem with what you are calling "soft grading."

I don't think anyone inside wants it changed, I don't think anyone ever does when a broken system benefits them more than those outside. That's why it was in quotes.

As you feel so strongly about this issue, I assume that you will not sit around and be complicit now that you are aware of the realities but instead will put in the hard work to marshall a campaign of change.

Should I have to be ready and willing to start a campaign every time I learn of something is unethical?

Am I not allowed to call out obviously unethical behavior without offering myself as tribute to correct it?

If I call you out for littering do I have to clean the whole planet?

Sorry this feels bad man, I don't think you are a dirtbag but I think you did a bad thing. Done plenty myself, my crosses to bear, but always turned out better when called out for it.

Cheating is unethical. Choosing to not aggressively grade because the costs (time away from your PhD work) exceeds the benefits is not. I put in what was expected I just didn’t put in more. My moral obligation was to my PhD work, not some grading crusade. No crosses to bear here.