I would go with the commonsensical view that academia is primarily an institution for teaching and research. I think of the credentialing as a byproduct.
Sounds logical.
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Andrew Gelman is probably more correct than Robin Hanson with respect to “academia”, but Michael Spence (along with Akerlof and Stiglitz) did win the Nobel Prize for his work on signaling. In particular, his work involved the signaling value of credentials (such as degrees) in labour markets. Interestingly, one of his assumptions was that obtaining the degree (signal) did *not* increase productivity (contrary to human capital economic theory).
While universities do use credential signals as a proxy for the unknown productivity of a potential professor, they will only be used if they do, in fact, work. That is, if the signal (credential) correlates well with productivity (research, teaching, etc.)
It is often useful to think as Robin does that “X is not about X”. At some point content becomes less important than fostering relationships in many pursuits. I am pretty sure that parents mostly pay for prestige when they send their children to big name colleges, because the price differential vs discounted state schools is so large. For an undergrad education, the content of the instruction can’t vary by an order of magnitude, as prices would imply with a “commonsense” interpretation. Andrew view’s is right about the logical function and history of academia, but he needs to elaborate it more to justify it from an economic perspective.
You could argue that parent are paying for future relationships outside of a signalling framework.
Or you could try to argue that eventually signals will revert to fundamental values in-line with underlying education. It is interesting that Robin often takes the “X is not about X” tack, yet has relatively sanguine views about the sustainability of market manipulation. In many markets, the price of X can stray from being mainly about X for some time.