...you could argue that there's evidence this is happening now. The economy seems to have bifurcated into large mutual fund ownership of public companies, and narrow private ownership of new startups that are aggressively disrupting those public companies. All that's needed are more arrogant assholes who believe they can up-end whole industries.
I'd argue; 1. that already happens, and is entirely tangential to index funds. I'd cite the west coast hiring collusion (apple et al.) a few years back. It's just a matter of when there is "enough benefit" to both parties, and as it turns out that happens relatively rarely; otherwise each corp seems to act in self-interest. (as makes sense)
2. investment in an index is often proportional to the weight of the company within that strata. Similarly; a company can only be in certain indices by nature of certain properties. Are we supposed to accept that companies will suddenly stop trying to be the big dog in their particular pile? Driving revenue from non-investment sources will continue to be necessary and competition will continue to serve that end.
Now, I'm not a financier, thus my looking at the above from a primarily "incentives/psychology" angle. But someone could tell me why I'm wrong to ALSO say that I don't see why "index funds" are special. Diversification has existed long before the funds, it just became much easier. You can pry my diversification from my cold dead hands; even if I have to set up my allocations/buckets myself. So why should I see this as anything other than an attempt to make a powerful technique less accessible such that market inefficiencies can continue to be exploited by the financial elite?
I see many similar echoes in this to a debate in a video game I play (Path of Exile) at the risk of drawing a strange comparison. Trading in the game is _terrible_. If you want to trade effectively/diversify/etc you need your own tools, special skills, time and expertise. As a result many junior players get screwed/ripped off/scammed/blocked from progressing, where savvey players get unbelievably rich. Whenever improving trading is suggested, a vocal subset responds viscerally against it saying it'll ruin the game etc etc; but as someone who currently takes a good amount of advantage in the current information assymetry, I don't buy that argument. Plenty of other games have good trading; and in the same sense, I imagine large funds were all heavily diversified similarly to indices prior to the 1970's.
So someone who knows this shit: tear my arguments apart. Show me why I shouldn't see this as just another instance of financial misdirection.
That said, I think diverse common ownership is probably less risky than concentrated common ownership due to collective action problems in the former that don't exist in the latter. E.g., if 10k people commonly own 25% of each airline, it's a lot harder for them to push for collision than if a single fund owns 25% of each airline.
Regardless, very interesting article.
