I liked
@less4success 's critique and decided to approach the article from a reviewer's standpoint (since I just had to review some scientific articles)
I think this is the central argument of the essay, buried in paragraph 7-8:
"Yet it has also moved the country toward a peculiar kind of financial oligarchy, one that might not be good for the economy as a whole...blah blah.. public markets have been cornered by a group of investment managers small enough to fit at a lunch counter, dedicated to quiescence and inertia."
What data is provided to support this argument?
1. Several paragraphs explaining why index funds are good for average investors.
2. A paragraph of quotes without evidence.
3. Then quoting some jokers who imagine a hypothetical world where I guess everyone is forced to invest in index funds? "Bernstein analysts, who point out that in a world with exclusively passive investors, capital will get allocated only to the big companies and not necessarily to good, promising, or efficient companies"
4. "When one of these commodities ends up on an index, the firms that use that commodity in their business see a 6 percent increase in costs and a 40 percent decrease in operating profits, relative to firms without exposure to the commodity, the academics found." They cite a paper that in Figure 1 shows no statistical difference in commodity prices before and after index funds start buying commodities, but shows significant differences in profits. I'm not an economics major so don't understand the details of their models, but they correlate this with managers not being able to find deals on commodities because index funds messed up their knowledge. How that happens isn't clear to me, but I have a hard time believing the 40% decrease in profits is due to index funds alone.
5. They raise the issue of correlation of bonds, stocks, etc. This is a valid concern, but unrelated to the central hypothesis of under-performing companies and again can't be blamed solely on indexing.
6. Strawman argument about monopoly power due to index fund managers voting on corporate boards to commit felonies. Even Blackrock (!) says the research papers the article mentions are nonsense. The author then backtracks on strawman argument and says it is accidental collusion because everyone is lazy due to index funds. No actual evidence beyond associations is provided, and no explanation for the mechanism behind this is provided.
7. Argument about executives being paid less for "performance". Not clear how this translates to actual performance, and no further discussion provided.
8. Contradictory arguments that index funds have at once too much influence due to their size but don't exert influence at shareholder meetings. No evidence that this is a problem.
9. Random statements about other aspects of the economy being too centralized, then the whole article goes out with a whimper.
10. No discussion of the obvious limitation of the above arguments: NO ONE IS FORCING EVERYONE TO INVEST IN INDEX FUNDS. If you have super-special knowledge of some awesomeness, you can invest in it and school us index fund weenies and save America!
Ugh. I'd give this paper a C at best. The best evidence they provide is a paper for a separate, unrelated investment field. Why are so many articles on the internet about some hyperbolic slippery-slope nonsense?