In my experience this teaches them how to cope with pressure and competition. I personally learnt alot about fair play and honour from tournaments. These lessons intailed learning how to win with honour and how to accept defeat and use it as a spring board to another victory. I believe learning these lessons early from a COMPETENT instructor /coach goes a long way to developing a more wholesome individual.
A lot of the problems with people in society nowadays is that they have never been tested and don't know their abilities. This unsureness breeds the associated social ills like bullying,criminality and other social ills.Having children compete gives them this self assurance and gives them tools to cope with life. I also should stress the proper education and involvement of the parents in the martial education of their children.
I had my first boxing bout when I weighed 30kg in primary school (and Karate non-contact earlier). I remember the day clearly because I had my light snuffed out by some kid and suffered my first nose bleed ( I put my hands on my hip in Karate style when I got tired). I learnt a good lesson from that and got addicted to full-contact fighting. I know kids in my school who also trained with me used to have daily fights at school just to prove how tough they were.
Since I was introduced to grappling arts Judo at 14,Wrestling 18 and Jujutsu from then on. I think that maybe learning how to hit is not as important for little children than being able to protect themselves without hurting anyone. That is the reason why the childrens class in my school is mostly grappling with locks and limited striking. I also find it's so much easier to make grappling fun and to create new games and drills for body movement and teaching the fundamental principles and it doesn't hurt half as much as boxing or Karate.
As to passing Fads well, morals ,money making schemes. Well, each to their own belief, my opinion is that as an instructor or coach you need to attach some value to the time that you spend sharing your knowledge otherwise you become drained and loose focus.