I (when I DM), and my regular DM both use alignment the same way in our games. For the vast majority of characters in our worlds (both PCs and NPCs), it's for the most part a roleplaying guide only. The only time it comes in to play as a game mechanic is when we are dealing with extraplanar powers. These beings are absolutes, being the incarnations of certain moral and/or philosophical viewpoints, and are the only ones affected by detection/protection spells. I include aligned magic items in that group as well since they are not truely living characters, but "forces". This seems to work well for us as it keeps alignments from "straightjacketing" players, but still allows epic struggles against the nefarious forces of "true evil". Heck, even my LE fighter doesn't like "true evil"

He actually worships a LG god. He's just a little bitter about life
Even for paladins alignment can be only a guide as it's actually the Code that a paladin follows, not an alignment. That making sure the Code is LG is the DM's job, then all the player has to do is follow it. In regards to the paladin's ability to detect evil, it only works on beings who are incarnations of evil (demons, devils, etc...) or magical creations powered by negative energy (evil weapons, undead, etc...). These are the only beings that paladins are allowed to destroy on sight anyway, according to my campaign's Paladin Code. In our game, alignments are as relative to the characters as they are to us players in real life...no one talks about paladins being "lawful good". They describes paladins as honest, faithful, generous, forgiving, humble, etc... because IMC that's what the Code requires of paladins.
Used this way, the alignment system seems to work just fine, so my vote is for "Yes, for reasons other than those stated"