reducing it solves a political and market structure problem, yes, but also creates a social problem in that many people have come to rely upon access to diversification plus a valuation-independent expectation of reliable outsize returns over a 5+ year horizon. 1/

none of which is distinct from the political support of market returns, which exists precisely because so many politically sympathetic people have come to rely upon access “the market” as a diversified aggregate. /fin

Insurance is a broad category, some of it is great, a lot of what is private ought to be public social insurance. 1/

But yes, it’s diversification that is the fount of more urgent problems than the active/passive distinction per se. Today’s indexers having fees skimmed in heavily diversified active funds wouldn’t much address any problems. /fin

the corporate governance issue (a more speculative case) doesn’t depend on the skill or attention of the supervisor, but their incentives. 1/

a very skilled and attentive diversified investor might prefer collusion, or even let some firms fail because the enhancement of market power in the remaining firms would more than make up the loss. 2/

shareholder skill and attention under these circumstances is a negative. shareholder skill and attention is socially valuable when shareholders are undiversified, and so want their horses to compete better than the other guy’s. /fin

i think we want to distinguish aggregate market value from individual share relative value. i agree that flow has a strong effect on aggregate market value (i’m not endorsing the number you quote though). 1/

i also think for individual issues, flow effects are asymmetrical with respect to relative value, that is colorably undervalued shares react more to flow than shares widely perceived to be fully priced or expensive. /fin