I was actually in a program like this for a year in elementary school (Vancouverites will know it as the MACC... we were the crazy kids).
The idea was that the structure of a normal class was too limiting and caused kids to act out. So we were given a class with 15 kids (gr 5-7), no letter grades, and no set curriculum. It was a really cool experience. It was interesting to see how, when given the chance, these elementary school kids would act far beyond peoples expectation. We studied math at our own pace - for some, like me that meant barely keeping up with grade level, but on the other hand half the kids were ahead by a year or two. One boy was in gr. 6 and getting tutored in university level math. We got to choose our own novels for literature study and kids were choosing things like 1984, Shogun and Stranger in a Strange Land.
Because we didn't follow the standard curriculum there was room for us to study what we were actually interested in. We generally got to do one big project per subject and were given next to no guidance. The lack of structure meant we spent the majority of our class time fooling around and projects NEVER got handed in on time. But at the same time the finished product was almost always far beyond what would be expected in a normal class room. Eleven year olds writing 5 page essays on Lord of the Flies? A twelve year old spending hours each week at the Hastings Mill Store Museum so she could learn every little bit of that part of her cities history? Kids would never be given these chances in a normal classroom. Kids don't even want to excel in a normal classroom. But give them the chance to work on something they actually care about and the results are impressive.
I think at the lower grades our system is working pretty well - kids are learning to read and write, add and subtract. These are things that form the background of our lives and are basics that everyone needs. More importantly these early years help teach us social skills for interacting with others. But soon after this the majority of school is a waste of time. So many of the things I 'learned' were forgotten the second I handed in the test. Who is benefitting from this? Not me, and not the people's whose tax dollars paid for me to be there. I probably would have gotten more out of being let loose in the library for a few hours each day.