Well he does say "To be clear, I’m not arguing that an entire market could ever go passive."

Which kinds of begs the question, how much passive investment can there be, and what is the limiting factor, if not a Grossman-Stiglitz model where 'arbitrage ' (in this context market-making, market-timing etc.) makes prices boundedly efficient, and less arbitrage means higher spreads, less liquidity, less pricing efficiency.

There must be a 'Bernstein peak' and mixed strategy equilibrium, where if you have too much active, expenses are too high, and if you have too little active, liquidity suffers and costs from spreads and volatility are too high.

http://abnormalreturns.com/2016/02/19/the-bernstein-curve/

No, the hypothetical assumes that 50% of all assets are passively-investable. 50% low-energy, 50% high-energy. There are a lot of brilliant, resourceful people in that high energy crowd who are establishing the share prices that the low-energy crowd then gets to take advantage of for nothing. High-energy percentage could likely be much, much less than 50% and passive investing would still work.

There is no real danger that so many people are going to turn passive that it won't work; there are plenty of people out there who think they can do better (and always will be, given human nature), despite the evidence that they won't.