There are democratic nations with many more parties than we have, and the quality of governance in many of these nations has proven to be as serviceable as the quality of governance in the US. (Some might even argue that many of these nations have displayed superior governance to the US despite the power being split up among so many parties that they need coalitions to accomplish the little they can get done.) I've never really found myself persuaded by the skepticism against split governments.
Now there may be a point of diminishing returns. As in 5 parties are as good as 10, are as good as 15. But that's an academic question, and we're not even at 5 parties yet.
On the other end, maybe 500 parties is self defeating, as you say. But we're nowhere near that either.
It could be argued that governance is better in other countries at least in part because there are more parties. After all, it enables alternative voices to be represented better, and it reduces the power of centralised party structures.
On the other hand, too many parties becomes unwieldy, and I'd argue that 10 is already going to be too many in practice.
Historical experience in the early 20th century led many countries to develop minimum bars, e.g. parties with fewer than 5% of the vote not getting any seats in parliament.
Now there may be a point of diminishing returns. As in 5 parties are as good as 10, are as good as 15. But that's an academic question, and we're not even at 5 parties yet.
On the other end, maybe 500 parties is self defeating, as you say. But we're nowhere near that either.