I think passive investing works, on average, because, on average, companies generate profits and increase in value over time. Active investing loses because transactions have costs in terms of management fees, commission and spread and is how stockbrokers make their money.

If 100% of the stocks were passive invested, then the game for banks would be to list companies as fast as possible, with as high capitalization possible. Who cares if its overvalued? nobody is looking. As soon as a stock is publicly listed it gets bought.

IT would not work. Not poorly, it just wouldn't work at all. This tells me that there is a balance on how much active/passive investment can there be, and at some point they will be balance by some criteria.

I agree that passive investing works, but the real story, I think, is that the economy is guaranteed to grow on average if the population keeps increasing and innovation keeps happening.

If the population grows 3%, we have to produce roughly 3% more, so revenues go up roughly 3%, number of employed goes up roughly 3%, so the economy grows 3%.

If I invent a steel manufacturing process that makes steel 3% cheaper, expenses go down 3%, profits go up, supply goes up, prices go down, the economy grows.

If all you do is passively invest, then over large periods of time you should on average see returns of, roughly, population growth + innovation. Even if everyone is passively investing, it's the same thing. If you actively invest, but still invest in the whole market (as any diversified investor does), you get the same thing, minus ~1% towards. If everyone was actively investing before, and the market grew ~8% per year, and now they passively invested, why would the market not gain the same?

No it wouldn't. Everybody could be a passive investor and the economy and your portfolio would just continue to exist.

Passive funds are priced based on the activity of active investors trading underlying securities.

I don't think he's implying that literally everybody trades passively, of course Zuckerberg is going to actively trade his Facebook shares, I'm going to actively trade my stock options at Public Company X, the guy down the street will still rent his house out instead of selling it and investing passively.

Plus, it's not like passive investing causes securities to never be traded, when I buy into a mutual fund I'm buying stock from someone. That someone is probably retiring and selling their securities.

Lastly, most "active traders" just buy a bunch of Blackrock/Vanguard/SPDR index funds anyway and call it a diversified portfolio that only they could deliver.

There would be a price without the constant underlying activity as well. This is basic financial economies.