Given a choice between managing a team of 10 recent college graduates vs a team of 10 different unique autodidacts, I'd choose the former. So it seems like education isn't mostly signaling. It's more about turning people into standardized employees, which is useful for the same reason standardized parts are useful. There might be cheaper ways to do that, though.

This puzzle is related to (and much simpler than IMO) the bigger puzzle of employment generally. What is the fundamental economic reason that a person accepts a fixed amount per hour or per year, and that an employer agrees to pay regardless of outcome. Why don't we see a lot more piecework and medium-term contracts?

There are a few reasons the education racket is a stable(-ish) equilibrium:

1) Employers don't individually pay for the signaling. Finding a cheaper signal helps those candidates who can spend less on school, but doesn't much help the employer who uses it.

2) Finding a more accurate signal benefits employers, but it doesn't remove the utility of education as a signal, it just augment it. In fact, MOST employers layer lots of other signals on top of education.

3) Most employers are products of education systems, and believe in the skills/knowledge theory more than they recognize the signaling theory.

4) The conformity requirement cuts both ways. Smart people who'll make good employees have to show they're able to act in accordance with expectations. And once that's baked in, they're likely to choose employers who don't challenge them on those dimensions. So it's a huge risk for an employer to defect from this selection mechanism.

Employer's incentives to signal are my chief suspect. People who do hiring want an easy way to defend their decision: credentials are the obvious solution; no one actually tracks how their decisions turn out anyway. I think Caplan mentions this, though I do not recall - perhaps it was in another review of the book I read instead.

However, my real suspicion is that medium to large companies are mostly indifferent to outcomes, and as a consequence actively prefer ambiguity. One reason is because principal-agent problems are huge and increasing, owing to the number of principal-agent layers everything goes through. For a tangible example, consider warranties - lots of companies now subcontract warranty fulfillment. I have had exactly 0 good experiences where warranties were handled by another company, because that company's incentive is to deny everything. Subcontracting is a plague upon the face of the earth.

Another reason would be the nature of publicly traded companies: success is defined in terms of an increase in stock price, and stock price depends wholly on investor confidence. Which means publicly traded companies are fundamentally confidence games. As a consequence, the only time company leadership is incentivized to improve clarity is when they are already certain the company is doing very well. By contrast, companies with mediocre and poor performance are still trying to increase investor confidence, and uncertainty which permits confidence is preferable to clarity which destroys it; it seems like they are incentivized to add noise. Since these are the incentives that govern how strategy is chosen, this problem rolls on down the organization.

Your post is mostly good, but I question your claim that majoring in English discourages conformity. My impression is that English departments reward conformity to a set of norms that somewhat conflicts with mainstream norms. I can imagine this being a valuable signal for unpopular professions.

The one who has student loan to pay is less likely to quit job.