Thank you for the reply. The subject has fascinated me for nearly fifty years, so I am happy to press on with it.

"I imagine you mean to say that index investors do none of the work in bringing prices to their fair value?"

Yes.

"...neither active investors nor index investors trade stocks to make markets efficient."

Investors all want to make a profit, but some make their profit by allocating capital efficiently, and some make their profit by separating fools from their money, not an entirely unhelpful contribution, but still. We subsidize capital markets because they allocate capital, and we tolerate bubbles and the like because we can't figure out a practical way not to tolerate them. But speculators who are agnostic on fundamentals behave unethically in my view. I have never found "Everyone does it" or its cousin "If I don't do it, someone else will" very persuasive. (To be clear, I don't regard index investing as speculation. Index funds assume that the underlying assets are priced pretty much in line with their values, not that some bigger fool will take them off the fund's hands.)

The "upside" of index investing is that the price inefficiency is offset by the labor efficiency. The marginal manager adds less value than he charges in fees. That's as inefficient an allocation of human capital as the index fund is of risk capital. With index funds available, natural selection works more intensively on the managed asset space. Only the few who do it best will survive. Some of those, of course, will simply be skilled traders doing their quant thing, but others will actually be doing the fundamental research and placing bids that reflect fundamentals accurately enough to make the indexes work. If no one managed assets actively, how would any share find a price?

If we assume that most of the pre-index-fund money managers are sent off to cure cancer, with the best managers sticking around to drive the bus for the indexers on their bikes, maybe the best overall allocation of resources is achieved. From a game-theoretical standpoint, then, my ethical compass points toward putting a significant amount of one's money in index funds but also a not insignificant portion in a managed fund to assure the robustness of the auction on which the index funds rely.

(I do not own any index funds. I short them as a beta hedge, but not too heavily, because over time, markets tend to rise, and beta money is as green as alpha money.)