governments should be funding universities because R&D has social and economic benefits. However, the paying customers of universities (students) are primarily interested in the job market, so universities will have a role as long as companies continue to use them as hiring filters. since direct aptitude testing by corporations is a legally tricky area, i predict the current credentialing system is unlikely to change for a while.
As for the ego trip, I doubt it (in most cases): research gives you the recognition of your peers. There is a clear trade-off in allocating your time towards stellar teaching or stellar research. Few professors manage both. And stellar teaching tends to get much lower recognition from the peers.
I disagree. Some academics want to do research. Some want to teach. However, the way for a university to gain prestige is to have active research programs, so prestigious universities emphasize research over teaching, and the prestige attracts students better than quality teaching does. If there's a contradiction, it's that students say they want to be taught, but when given the choice, choose prestige over teaching.
So we get ever-rising tuition driven by state cutbacks, ever-rising student debt, ever-tightening research funding, and MOOCs. A reasonably good institution (research academia) is destroyed because nobody really believes in its original mission (uniting teaching with research) anymore, and just want its members to specialize in one aspect or the other.