A finance writer that actually knows what he's talking about, and it's here on HN. This is nice.
Another good article where he discusses the Goldman software developer who 'stole' company code:
http://www.bloombergview.com/articles/2015-07-07/goldman-cod...
But saying "index funds free-ride on the work done by active investors" and then following with "no one thinks that active managers should be able to charge for their services, is a world that will spend too little time and effort on allocating capital to the right businesses" is FUD.
The value of the market represents the sum total opinion of everyone in it (plus noise), not just the managers of mutual funds losing business to index funds. Frankly, it sounds like the griping of someone telling fund managers that they deserve their fees, but the supposed loss from using index funds described in the original article (~.2%) is still dwarfed by the increased fees of actively managed funds.
Most index fund expenses are around .1-.2%, while most active funds come in at a whole 1-2%. To justify the cost of an actively managed fund, a manager has to not just beat the market, but trounce it. Very, very few can do so for any length of time, and they know it, which is why articles trying to convince people of the virtue of active fund management are constantly written. Unless your manager is as good as Buffett, buy an index fund.
The math is simple, but there's many fund managers out there trying to convince you otherwise.
However, we are in no danger of running out of active traders, so there's no need for anyone to run out and sell their indexed investments to save the free market ...
The little coda about active management makes more sense if you read him religiously, because this is a schtick of his. Passive management helps most investors. But the market as an entity benefits from active management, because active management makes prices more accurate. This despite the fact that for the most part, contributing to the accuracy of prices comes at the expense of the actively-managed funds.
So without active management, the passive funds would perform more poorly, because their prices wouldn't benefit from the corrections of people trading into them to profit from mispricing.
There's also a kind of second-order version of market efficiency that says that active fund managers that can actually beat the market will increase their fees until their post-fee returns are the same as everyone else. So even if active _fund managers_ get compensated for making prices more efficient, there's no reason to believe that _fund investors_ will be.
This is evidence for the "second order version of market efficiency" your mention: it was uncanny, and put me into index funds for life (that, and the fact that there was no way of predicting from year-to-year which funds would beat the market the following year.)
There is a good reason that index funds are very difficult to beat consistently, and it's not because they are copying all the hard work everyone else does for fees. It's because you don't get paid for specific risk.
But like tptacek said, you probably need to read Levine regularly to unpack his argument there; it was extremely self-referential.
The market needs active traders for stock prices to accurately reflect investor opinion, but actively managed funds are not the only source of active trading.