As we saw in the 2008 recession when more and investors pile on even the safest investments (mortgages backed securities) the quality of those investments tends to be diluted (via CDO's, errant ratings companies, exploitative real estate practices)
This is what's making me nervous about index funds right now, the demand seems extremely high, but what about the supply how would you determine such a thing?
What is investors are smart but there simply aren't enough good investments out there? Are they going to give up and become doctors, lawyers or engineers? Or just spend more time with their kids?
If there aren't enough good investments now then that's an indication that the market believes there are major structural problems with the economy that will prevent the future from being richer than the present.
That's a far, far, more serious issue than just a question of what the kind of people who expect to receive passive incomes will do with their time.
Obviously, the pandemic is having a major current impact, but as you say, there has been a shortage of good investments since at least 2008.
I believe the underlying issue is a misallocation of resources into rentier economics and not enough into productive growth. We've collectively put far too much money into monopolies that squeeze larger percentages of money out of people and not enough money into innovation that improves the human environment. We need more of the original Google (i.e. the revolutionary search engine) and a lot less of the current Alphabet (i.e. the rentier advertising monopolist).
Otherewise, either by buying an index or a stock normally, ur giving ur money to other investors, not the company itself.
Investors do a lot of work, because they have to constantly think where to put their money, evaluate alternatives, make sure there is no money wasted on things, etc. Even passive investors who only have S&P portfolios still contribute to the economy by providing capital to companies to invest into new things.