If you subscribe to the "efficient markets" theory, aka the "random walk" theory, then index funds are the only investment method that make sense. The idea is that over time, the majority of investors will not beat the market, because markets are efficient and all stock prices instantly reflect all information that is available to all investors in the market. I've always had reservations about this theory, but academia and many on Wall Street subscribe to it. One thing I can't dispute is that over time, most investors (professional and amateur) will not significantly do better than the market.

Index funds provide the investor with an easy, low-cost method of managing their investments. Certainly for those who do not have a background in portfolio management theory or statistical analysis, index funds make a great deal of sense. The vast majority of investors who do not have such a background and take an active investment approach, don't do very well over time. For such people, a passive approach (indexing) makes a lot of sense. Another advantage to indexing is the low cost. Index funds do not alter their portfolios at all, so you will not pay or overpay funds managers in management fees.