Eric Falkenstein has long said that the risk premium doesn’t make sense — and not just in investment markets:
I was reading a book, The Decline and Fall of the British Aristocracy, by David Cannadine, which covers 1870 through 1930. They highlight that this was the strongest aristocracy in Europe due to primogeniture and Britain exceptional wealth, and so the combination of power, status and wealth was unequaled. In 1880 only 10,000 people owned 66% of the land. Yet land prices fell after 1880 due to a collapse in agricultural prices, the rising industrial sectors marginalized the rural areas that historically gave the nobility so much of their wealth, and new laws turned power irrevocably from nobles to number (the Third Reform Act of 1884).
Classical liberal Richard Cobden wrote that ‘the battle-plain is the harvest-field of the aristocracy, watered by the blood of the people’, meaning, the aristocracy prior to 1900 generated their legitimacy via their willingness to lead groups into battle (often needlessly). As the British aristocracy declined from 1880 to 1910 they thought that World War 1 would re-establish them as the top of their country. Many were eager to fight, mainly afraid the fighting would be over before they could prove themselves in battle. Yet, while they proportionately lost more of their sons than those of other classes in WW1, the decline of the aristocracy continued unabated after the Great War. Indeed, the loss of life sharply curtailed the supply of domestic servants, and inheritance taxes went from nothing to 60% by 1939. The lower classes felt no sense of gratitude towards the aristocracy, having lost enough themselves. Battlefield courage is admirable, but it is not sufficiently rare to generate privileged status; the lower classes were not party to such an exchange.
In retrospect, the aristocracy arrogated power via myth, tradition, and brute force, rationalized via their exception valor. The problem with their self-serving story is that many would accept a probability of death for such success, so this ‘courage preference’ was not a real equilibrium result, as WW1 showed. Courage was a necessary, not sufficient, condition for acquiring power.