To put it another way, imagine if a strategy for funding software development was to take every piece of software that compiled and then randomly choose among them to fund. This seems like it's ripe for exploitaton and hard to fund meaningful software development (especially coherent ecosystems).
Similar dynamics would probably be at play for research.
You can stop the grant stuffing gaming by limiting the number of grants people can apply for every year.
I think it has not been proven to be impossible to determine the difference between a top 5% and a top 10% grant, it has just been proven that the current system does not do that. In trainings for grant applications it is often mentioned that members of grant committees spend extremely little time per grant proposal, which I imagine is just sufficient to weed out the bottom 25% proposals (those that contain obvious flaws)
It has been proven that grant reviewers can’t agree amongst themselves what are the top 5% verses the top 10%. Having personally gone through the process as a reviewer I can identify the difference between a good and a bad grant, but I can’t with any reliability determine the difference between a top 5% and a top 10% grant. Once you get into the top 25% of grants the ranking gets very arbitrary. I might like one grant more than another purely because I like the area more, but my taste should not be the criteria on which grants are chosen.
The crazy thing is all of this is known by everyone involved in the grant process yet everyone continues on as though the system is working.
This is taboo to say explicitly of course, one must say that it's all internal passion, but people, whether they admit it or not, will have to strive for these things. If they don't, they fall behind.
This goes way way deeper than grants. It's not even just human nature, but a fundamental property of life. The same is true in dating. You have to present yourself in the best possible way, and those who do have better success.
It's not enough that you and your ideas are good, you have to be able to convince people that you are worth investing in.
You can't forbid people to associate, to form cliques, to keep tabs on who is good and who isn't (and the same for departments and universities) etc, to invite each other to work together.
A grant that led to a sexy result will be considered money better spent, than something that leads to no presentable conclusions.
And beyond the gaming, there are genuine differences in how good a research vision some people have. Top, visionary people vs mediocre incrementalist copycats is a real distinction.