I have heard this argument before. While there is a kernel of truth, it is pretty small one. Craig Lazarra at S&P recently did some interesting analysis that reveals that we are not even close to reaching the point in which passive investing becomes so large as to become problematic. The reason is that most of the trading is done by active fund managers, so it takes very little presence of active managers to create efficient markets.

In theory (emphasis on theory), this may be a problem in the distant future, but this renders the argument to use active funds now to be something along the following lines: "use active managers now even though the odds are that it will fail because maybe someday it won't." That is not a compelling argument on which to make an investment decision -- especially if it involves somebody else's money.