> ...come to think of it, I wonder if colleges know that their primary value is as a signaling mechanism, and intentionally restrict the size of the incoming class to preserve that signal. In other words, they're aware that they don't actually add any educational value, they just ensure that they only admit students who would've succeeded anyway and then point to all their successful graduates.
I think what you're saying is that they don't add any additional educational value beyond what your hypothetical band of PhDs could. They do provide educational value and also the signalling, though perhaps they don't acknowledge the latter so much.
But at least with pre-university education, as far I've seen, the process you describe is what most private preschools, primary and secondary schools engage in: They can essentially select their student population for the children who are most prepared, either by means (== family support system) or by their natural abilities.
Even those private schools that have scholarship programs for underprivileged students only accept students who are exceptional and don't have serious social functioning issues.
These schools then point to the achievement of their students as an indication of their superior educational process (which in some cases might be true, due to just having more money to provide better educational services).
Public schools, by contrast, must accept students of all abilities, and thus look worse on paper, when they are often dealing with a much more diverse, and often more challenging set of student backgrounds.