Index funds are socialism (in the best and worst sense)!
Nice read, a well written and logical post overall. I have a few questions:
1. “Not only does this mean that active investing provides positive externalities, passive investing actually imposes negative externalities.“
But how does the existence of inefficient markets imply active investing provides positive externalities? And how does that relate to the GS paradox?
2. Do passive investors not contribute to the price discovery?
3. Even after internalizing externalities, there is no guarantee that the costs of transaction will be low. Also, the cost of internalizing the externality might exceed the mismatch. In the example used, the bottle company was owned by the battery company, which is hardly the case except when talking about the handful of universally large private firms.