IMHO I don't think you truly practice an art if you never compete in it. I don't think I would really understand my limitations if I didn't test myself against people from outside of my school, people who are not my friends, people whose training is not identical to mine. After practicing with the same students over a period of time, you learn their tendencies, and it can cause your training to fall into a rut. It can also give you a false sense of security.
I don't want to be given belts for "service" to my art, I want to earn them the old-fashioned way. I want to know that the skills I am learning are useful against people who train elsewhere. The first time I competed against an outside student in Jiu-Jitsu, it was truly shocking. Nowhere in my training had I experienced anything like it, and it really opened my mind. There is no question that I have learned much more because of competition.
Of course, the true test would be if I ever have to use my knowledge in a real self-defense situation, but that is something I hope will never happen. Competition may not be the same as a street fight, but it's the closest I am able to come. Learning to remain calm under stress is one of my biggest goals, and that certainly makes competing more beneficial to me than not competing.