I won't elaborate too much, but consider a situation where the vast majority of of participants just bought a basket of diversified index funds and what the effect would be on the stock market... it would effectively entrench existing companies at their current levels. Regardless of whether Apple or Microsoft or whoever is profitable or not profitable, their relative market cap would basically remain static since people are not buying stocks on the basis of performance but simply buying stocks on the basis of their relative market cap as it existed at some moment in time.

Index funds work because not everyone buys them, they work because the majority of capital is allocated and constantly being rebalanced in a way that tries to reflect the performance of a corporation. It's only in this circumstance that an index fund, or any kind of passive investment, can be of any utility by leveraging the work of those who are actively trying to assess the genuine value of a corporation.

Thank you! I think it makes sense