The reason elite colleges are elite is because they are filled with people deemed "the elite." Got that?
A big part of the experience at ANY undergraduate school is WHO you happen to be learning WITH not just who you are learning FROM. Harvard made a very deliberate decision to cultivate a class composed of the BEST students from across the nation. It's easy do educate students that are ALREADY motivated, good students. BTW, Harvard also took great pains to make sure that there weren't too many Jews or Asians in the freshman class. (So I guess that signalling thing works in some unanticipated ways too.)
Just keep in mind that signals come in many forms.
Since the admissions standards of Harvard Extension school are lower, it doesn't matter that the students can do the same work. It matters that the students weren't selected in the same way. Selection itself matters to the signal that the education is sending.
As for Harvard (etc) not selecting for Jews and Asians, very explicitly throughout the first 60 years or so (Anyone particularly interested in the topic should read Karabel's The Chosen), that's also, exactly as you point out, a signal sent if you went to Harvard in those years. That doesn't make the policy right or wrong, it just means that if you graduate from Harvard in 1930 you're likely a WASP, and, indeed, that item on you resume is signally to all sort of employers that a good Harvard WASP interviewed you and deemed that your character is fit, that saves a step when they want to hire you at their White-Shoe law firm circa 1935.
BTW, which "first" 60 years are you talking about? Harvard's admission process wasn't /really/ competitive until the 50's.
http://www.newyorker.com/archive/2005/10/10/051010crat_atlar...
Neither of our statements re:admission is exactly correct, but what I meant is that admissions wasn't anywhere near being fair until at least the early 1960s (and that's being generous to Harvard), so the 60 years I was referring to was from 1900-1960. Buuuut, that's not quite right because when Eliot was President things were a little more competitive, but whatever.
Did you know that Columbia will hand you a masters degree in Electrical Engineering or Chemical Engineering even if you've never set foot in New York?
Are those guys (those who earned their degree over the Internet) fakers too?