If corporate bonds typically default 1% of their principle value every year and lose half of that amount after all recoveries, then the risk payment is 0.5% per year - that suffices to amortize the experienced losses. We say it is the true insurance cost of the risk.
In addition to return of capital, and insurance cost or risk amortization, and also the true interest on capital I am saying it legitimate, there is another kind of reward often earned by some investments of capital. That is entrepenurial profit, from choosing a form of investment superior to the average use of capital. That isn't mere interest from capital either, though it is part of the earnings from capital and I claim a legitimate part of it.
But it is not required for the income from capital to be legitimate. Even a form of providing capital to others that earns no extra enterpenurial profit, and may not even take the risks associated with that; and even providing capital in ways that do not involve any risk to speak of, still deserve what they earn.
Distinguish the propositions, just to be clear about them - not saying this is the position you are taking. Some man might say it is only legitimate to earn any interest at all if you are at risk of losing everything and sometimes do, and might even say that the amount of the interest is only legitimate if the average losses in the long run equal the interest paid - he would be allowing the legitimacy of *insurance cost* but specifically denying the legitimacy of interest, or of income from capital simple *as such*.
And the full legitimacy of income from capital simply as such, is what I am maintaining. I claim that men do not need to run elaborate risks, nor to be right about entrepenurial profit opportunities no one else sees, to deserve an income for providing their capital to others for productive uses. I claim that simply providing that capital to others is itself a worthwhile service that deserves its income, even if all the other factors are completely lacking.
"Deserves"?
Perhaps a better word might be "entitled"? Is this some sort of financial "entitlement" mentality? Socialism for the providers of capital?
Your first two or three paragraphs were irrelevant to the point I was making. I'm well aware that expected risk is factored into financial transactions. My point was that when the models and the algorithms fail (as they sometimes do) resulting in income imploding and losses skyrocketing that should also be a part of your "proposition" but one which I didn't see mentioned.
I consider my own profession to be a "worthwhile service" to use your phrase. However, someone could invent something tomorrow which renders my service redundant and I'd be looking for a job. That's a "risk" I have to live with but it doesn't mean I deserve something if that "risk" becomes a reality.