The risk worries me too. Look at it this way: the whole purpose of a market is to allocate capital to productive ends. If everyone invests in index funds, market capitalization (and thus capital allocation) becomes a function of inertia and ceases to have anything to do with actual performance (because nobody is interested in looking at actual performance). As a result, I'd expect productivity growth to slow.

Guess what? Productivity growth has been slowing.