I agree that the demand for education is artificially high. However, I disagree that the main reason for this is that education primarily performs a signaling function. I think that if it were all signaling, then we would observe lots of competing forms of signals in the market.
I suspect that there are multiple causal factors for the artificially high demand for education. You can start with the fact that it's compulsory. You can add in government subsidies, plus the subsidies provided by alumni donations.
Another big distortion is credentialism. Sure, you might be a good lawyer without going to law school. And you might be a good physical therapist without suffering through a liberal arts education and two or three years of post-graduate education. But try getting a license!
In addition to the state-enforced credentialism, there is informal credentialism. Lots of academic departments will not consider hiring anyone without the right credentials (not just a Ph.D, but a Ph.D from an acceptable program). Lots of alumni of top business schools look for other alumni when they fill positions.
I would also caution that most people are not autodidacts. They do not learn enough on their own initiative. Not knowing what to learn or how to go about learning, they are bound to waste a lot of time in their education process. It is possible that, as inefficient as education appears to be, for these non-autodidacts, it is less inefficient and wasteful than if they floundered trying to determine for themselves what it is that they need to learn.