These are things that I think are fallacies, that I tried to disprove by a simple example:

1) That the move toward indexing drives dumb money out and makes prices more efficient

2) That everyone can index and get the market return, even after trading costs

To your first point, on the contrary, I believe that active investment makes prices more efficient. There is a Nash-like equilibrium where enough smart people are active investors to make prices boundedly efficient, and adding the marginal active investor doesn't make prices sufficiently more efficient to offset their expenses.

As more people index, on the one hand they save on expenses, on the other hand liquidity decreases and volatility increases. They pay a higher premium for securities in the index, and a higher toll to get in and out.

Your second point I think is correct, basically it's just a picture people need to understand the true nature of the zero-sum problem.

3) I basically agree, and I think the bigger problem with Sharpe is that people are guaranteed the market return only if they don't trade. His mathematical proof that indexers always match the market is, of course, correct insofar as the passive investor who does nothing, gets the market return. But as soon as you trade, you’re an active investor in that period (Sharpe’s footnote 4). And the spread you have to pay to transact is the gain of the active player on the other side. So passive performance = active performance, but only because the passive investor has to briefly become an active investor in order to get fleeced. In order for the passive investor to match the market in practice, he must be able to trade in size at the market price and not allow himself be exploited. Which is not a bad assumption at small scale but gets harder as the passive investor gets bigger. (Sharpe hand-waves past this in footnote 3, saying trading makes the math more complicated but doesn’t change the basic principles. But if passive trading is big enough to move the market, if effective trading spreads are sufficiently large, that can no longer be true.)

Thanks for the thoughtful comment... In my opinion there aren't enough 25-year-old margin investors to really move the needle for the body of active investors in the US. This may not always be true, see for instance this paper about Taiwan - (h/t Wes Gray) http://faculty.haas.berkeley.edu/odean/papers%20current%20versions/just… . But I think in the US the naive investors are far less important and the average active investor can pick up only a few basis points from them.