Investing in the Classics

Machiavelli’s The Prince: On Good Foundations

Please note that for the purposes of this analysis, I use the Harvey C. Mansfield, Second Edition translation of Machiavelli’s The Prince. Please refer to a previous analysis which I build on here.

rsz_portrait_of_niccolò_machiavelli_by_santi_di_tito

The necessity of a prince or republic to establish good foundations from the beginning is a message that reverberates across Machiavelli’s major works. Foundations are a multifaceted for Machiavelli; in his Discourses on Livy, foundations comprise both beginnings, institutions and principles, but in The Prince foundations are more palpable; the prince’s supporters and his arms. Machiavelli shrewdly and cogently advises that a prince who desires to maintain his principality ought to establish good foundations from the beginning, even though doing so oft requires short-term discomfort. In particular, Machiavelli argues that a prudent prince will put himself in the best position for long-term success by choosing his supporters carefully and by relying one’s own arms. Investors today can still learn important lessons from Machiavelli’s advice, with the apposite parallel being the importance of carefully and wisely choosing one’s clients and relying on one’s own intellectual capital as a formula for long-term success.

 

Machiavelli begins his discussion of building good foundations in the chapter titled “Of the Civil Principality”. In this chapter Machiavelli discusses the best course of action for a prince who has come to power via the support of another group, as opposed to those who come to power via their own virtue or by private fortune (e.g. inheritance). The same holds true for most investors, where support is defined by the investor’s capital providers. Most investors are akin to Machiavelli’s civil princes, that is relying on the support of fellow citizens for capital, as not all investors are fortunate enough to inherit sufficient funds to begin a fund. Fewer still have the virtue to grow their own capital to the sufficient scale required to run their own fund due to the skill and time required. Machiavelli begins:

“when a private citizen becomes prince of his fatherland, not through crime or other intolerable violence but with the support of his fellow citizens… I say that one ascends to this principality either with the support of the people or with the support of the great [aristocrats]. For in every city these two humors are found, which arises from this: that the people desire neither to be commanded nor oppressed by the great, and the great desire to command and oppress the people” (Ch. IX).

Machiavelli asserts that there exists two factions in every city, that of the nobles and that of the common people, who each have their own interests. The nobility are by their disposition more rapacious and greedy, according to Machiavelli, whereas the people are more modest and pusillanimous. The same holds true for capital providers; broadly speaking they can be divided into two similarly disposed factions: ‘hot money,’ characterized as meddling, disloyal, and short-sighted (Machiavelli’s nobility) and genuine clients, characterized as risk averse and patient (Machiavelli’s people).

 

The differing interests and powers of these groups can have an imperative effect on the prince and his ability to secure himself against one or both of these humors. Moreover, the prince cannot appease both sides as their interests are contradictory, hence the prince must choose one side or the other less he alienate both against himself. Machiavelli writes:

“He who comes to the principality with the aid of the great maintains himself with more difficulty than one who becomes prince with the aid of the people, because the former finds himself prince with many around him who appear to be his equals, and because of this he can neither command them nor manage them to suit himself. But he who arrives in the principality with popular support finds himself alone there, and around him has either no one or very few who are not ready to obey. Besides this, one cannot satisfy the great with decency and without injury to others, but one can satisfy the people; for the end of the people is more decent than that of the great, since the great want to oppress and the people want not to be oppressed” (Ch. IX).

Machiavelli argues that the prince who comes to power with the support and help of the nobility maintains himself with far greater difficulty due to the ceaseless ambition and greed of the nobility, nor can he appease their desires without alienating the people. Similarly, the investor backed by ‘hot money’ clients will find their position uncertain as he cannot appease their demand for short-term performance without taking on excessive risk, which is likely to alienate both himself and whatever genuine clients he may have or wish to gain.

 

Machiavelli, a man of the people, championed the prince to choose the people over the nobility. Not only is the end of the people more decent than that of the nobility, but allying with the nobility can be perilous for the prince. Machiavelli explains:

“Furthermore, a prince can never secure himself against a hostile people, as they are too many; against the great he can secure himself, as they are few. The worst that a prince can expect from a hostile people is to be abandoned by it but from the great, when they are hostile, he must fear not only being abandoned but also that they may come against him… they always move in time to save themselves… And to better clarify the issue, I say that the great must be considered in two modes chiefly. Either they conduct themselves so that in their proceedings they are obligated in everything to your fortune, or not. Those who are obligated, and are not rapacious, must be honored and loved… but, when by art and for an ambitious cause, they are not obligated, it is a sign that they are thinking more for themselves than for you; and a prince must be on guard against them, and fear them as if there were open enemies, because in adversity they will always help ruin him” (Ch. IX).

The prince cannot trust the nobility to remain faithful, especially in times of adversity, because they are too ambitious and licentious. Much of the same holds for the investor. Speculators and faithless clients cannot be relied on, especially in times of adversity. Their licentiousness prevents them from taking a long-term view and oft makes them meddle in the business of the investor, believing themselves to be of insight and ability when they are wholly unqualified. The prudent investor can easily defend himself against this faction by declining their capital with de minimis long-term repercussions. On the other hand, genuine clients, so long as the investor remains prudent and doesn’t lose money from excessive risk taking, will find himself secure.

 

Machiavelli advises that a prince who originally came to power with the support of the nobility ought to ‘switch sides’ and gain the support of the people instead. Machiavelli concludes:

“Therefore, one who becomes prince through the support of the people should keep them friendly to him, which should be easy for him because they ask of him only that they not be oppressed. But one who becomes prince against the people with the support of the great must before everything else seek to gain the people to himself”  (Ch. IX).

Similarly, the investor who comes to be with the support of speculative capital ought to before everything else seek to gain genuine clients, for the speculative capital will ruin him at the first opportunity. Machiavelli provides several examples, ancient and contemporary, to illustrate and illuminate this point. He cites the example of Nabis, who became ruler of Sparta by executing many of the aristocrats who had brought him to power. Sparta was paralyzed by the oligarchy and was in desperate need of reform, Nabis judged. Thus, he seized power by allying himself with the people over the aristocracy to the benefit of the polis, as Machiavelli implies:

“Nabis, prince of the Spartans, withstood siege by all Greece and by one of Rome’s most victorious armies, and defended his fatherland and his state against them: and when danger supervened it was enough for him to secure himself against a few, which would not have been enough if he had had a hostile people” (Ch. IX).

Machiavelli emphasized this point earlier in the previous chapter in the case of Agathocles, the lowly son of a potter who rose up by his virtue to become king of Syracuse. In doing so, Agathocles killed all of the Syracusan nobility in order to consolidate his power and achieve the political reform necessary to defeat their Carthaginian aggressors. As Machiavelli writes, “[Agathocles would] live for a long time secure in his fatherland, defend himself against external enemies, and never be conspired against his citizens” (Ch. VIII). Agathocles, as Machiavelli makes explicit, lived secure for a long time, and was never threatened by external nor internal enemies. While I do not recommend such draconian measures, Machiavelli’s central message holds true: the right supporters are necessary for long-term success, and the wrong one’s can facilitate your downfall.

 

It is not simply enough to just have the right supporters to achieve long-term success, the prince and the investor still need to have the requisite virtue to perform their duties. However, when a virtuous prince or investor lays his foundations well with supporters that share similar goals and interests, he find will that long-term success is far easier to maintain. Machiavelli concludes:

“And let no one resist my opinion on this with that trite proverb, that whoever founds on the people founds on mud… when a prince who founds on the people knows how to command and is a man full of heart, does not get frightened of adversity, does not fail to make preparations, and with his spirit and his orders keeps the generality of people inspired, he will never find himself deceived by them and he will see he has laid foundations well” (Ch. IX).

I hope to illustrate these points through the uncanny example of Cesare Borgia, the surprising and notorious protagonist of Machiavelli’s Prince. Borgia, also known as Duke Valentino, came to control the Romagna (a northern region of Italy) with forces owing to his father, Pope Alexander VI. Despite his good fortune, Machiavelli asserts that Borgia “did all those things that should be done by a prudent and virtuous man to put in the states that the arms and fortune of others hand given to him” (Ch. VII). Having seized the Romaga, Borgia could have been content to leave the nobility in place or despoil it for himself. Instead, he resorted the region to peace, laid the foundations for good government, and won the people to his side. Machiavelli expounds:

“Once the duke had taken over the Romagna, he found it had been commanded by impotent lords who had been readier to despoil their subjects than to correct them, and had given their subjects matter for disunion, not for union. Since that province was quite full of robberies, quarrels, and every other kind of insolence, he judged it necessary to give it good government, if he wanted to reduce it to peace and obedience to a kingly arm. So he put Messer Remirro de Orco, a cruel and ready man, to whom he gave the fullest power. In a short time Remirro reduced it to peace and unity, with the very greatest reputation for himself. Then the duke judged that such excessive authority was not necessary, because he feared that it might become hateful; and he set up a civil court in the middle of the province, with a most excellent president, where each city had its advocate. And because he knew that past rigors had generated some hatred for Remirro, to purge the spirits of that people and to gain them entirely for himself, he wish to show that if any cruelty had been committed, this had not come from him but from the harsh nature of his minister. And having seized this opportunity, he had him placed one morning in the piazza at Cesena in two pieces, with a piece of wood and a bloody knife beside him. The ferocity of this spectacle left the people at once satisfied and stupefied” (Ch. VII).

Not only is this passage the most famous passages in The Prince, it is also one of the most insightful. Through the example of Borgia, Machiavelli reminds readers that what is suitable for one time is not necessarily suitable for another. Each action occurs for a particular end, once that end is achieved, a different means might be in order to maintain it than what was required to achieve it. As Machiavelli articulates more explicitly elsewhere: “when the deed accuses him, the effect excuses him; and when the effect is good… it will always excuse the deed; for he who is violent to spoil, not he who is violent to mend, should be reproved” (Discourses on Livy, Book I.9). While I certainly do not recommend investors emulate Borgia’s actions, I believe investors can learn much from his case, as Machiavelli argues: “Thus, if one considers all the steps of the duke, one will see that he laid for himself great foundations for future power… for I do not know what better teaching I could give to a new prince than the example of his actions” (Ch. VII).

 

Good foundations do not end with support alone. Machiavelli oft reminds readers that to acquire is one thing, and to maintain is yet another. In the case of good foundations, the obverse of support is arms for the prince. For the investor, the obverse to capital is labor, whether that labor is the investor’s own or that of their employees. Machiavelli’s analysis regarding those who bring princes to power reverberates the same themes for those who help the prince govern, namely that of the prince’s military and magistrates. Having touched upon magistrates in a previous analysis (see Machiavelli’s The Prince: On Leadership), I shall leave out reasoning on magistrates and shall speak of arms. Machiavelli writes:

“I say, therefore, that he arms with which a prince defends his state are either his own or mercenary or auxiliary or mixed. Mercenary and auxiliary arms are useless and dangerous; and if one keeps his state founded on mercenary arms, one will never be firm or secure; for they are disunited, ambitious, without discipline, unfaithful; bold among friends, cowardly among enemies” (Ch. XII).

Just as relying on the nobility can be dangerous for the prince, so can mercenary or auxiliary arms. This is so for much of the same reasons. Mercenary and auxiliary arms are ambitious, disloyal, and will flee or turn on you in adversity or for short-term gains. The parallel for investors is relying on labor, that is investment ideas, that are not your own or that of your employees. Relying on investment ideas that are not your own is more inimical for the investor, for one cannot hold others accountable the way one can hold themselves or one’s employees accountable. Even more innocent practices, such as relying on exogenous sources just for sourcing ideas, can be more pernicious than one realizes; for if one becomes too dependent on others for sourcing and doesn’t learn how to be self-sufficient, they can find themselves exposed as one always expect others to be around to provide ample and astute ideas. All of this harkens back to Machiavelli’s fundamental distinction between relying on virtue vs. fortune (see Machiavelli’s The Prince: Virtue vs. Fortune – Part I & Part II, and Machiavelli’s Discourses on Livy: Virtue vs. Fortune). Machiavelli illustrates this notion with the following example:

“In fine, the arms of others either fall off your back or weigh you down or hold you tight. Charles VII, father of King Louis XI, who had liberated France from the English with his fortune and virtue, recognized this necessity of arming himself with his own arms, and laid down an ordinance in his kingdom for men-at-arms and infantry. Then his son King Louis eliminated the ordinance for infantry and began to hire Swiss [mercenaries]; this error, continued by others, is, as one sees now in fact, the cause of the dangers to that kingdom. For when he gave reputation to the Swiss, he debased all his own arms, because he had eliminated the infantry entirely and he had obligated his men-at-arms to the arms of others. For after they had become accustomed to fighting with the Swiss, they did not think they could fight without them” (Ch. XIII).

Through this example, Machiavelli illustrates the pernicious effects of relying on others arms, as the more blatant example of betrayal by mercenary arms need little elaboration. Machiavelli defends this dictum, stating “And it has always been the opinion and judgment of wise men ‘that nothing is so infirm and unstable as fame for power not sustained by one’s own force’” (Ch. XIII). In the case of King Louis from the aforementioned example, Machiavelli concludes that a “lack of prudence in men begins something in which, because it tastes good then, they do not perceive the poison that lies underneath” (Ch. XIII). Here, Machiavelli strikes the heart of the nature of speculators; they are a greedy and indolent, whatever tastes good in the short-term will always prevail among these psychological invalids.

 

Machiavelli concludes that “it is necessary for a prince to have good foundations for himself; otherwise he must of necessity be ruined” (Ch. XII). A prince will have laid his foundations well when he has good supporters and can rely on his own arms. However, this is not a recipe for long-term success, as has already been pointed out earlier; these factors make it easier for the prince or investor to maintain himself. When a prince or investor is prudent and virtuous and has laid good foundations for himself, he will likely find that he will not only maintain themselves, but also flourish. I conclude with Machiavelli’s example of Hiero II of Syracuse from the coda of the apposite chapter “Of New Principalities That Are Acquired through One’s Own Arms and Virtue”. Machiavelli writes:

“From private individual he became prince of Syracuse, nor did he receive anything more from fortune than the opportunity. For when the Syracusans were oppressed, they chose him as their captain, and from there he proved worthy of being made their prince. And he was of such virtue, even in private fortune, that he who wrote of him said ‘that he lacked nothing of being a king expect a kingdom.’ Hiero eliminated the old military and organized a new one; he left his old friendships and made new ones; and when he had friendships and soldiers that were his own, he could build any building on top of such foundations; so he went through a great deal to acquire, and little to maintain” (Ch. VI).

In many ways, Hiero a Machiavellian archetype of one who establishes good foundations. He established good foundations by changing his supporters and his arms (to that of his own, by much of the same method that Agathocles did one century before him). As a man of virtue, having established good foundations, Machiavelli concludes that he could building anything, and although it required a fair deal of work to acquire, it cost little to maintain in the long-run.

WP-Backgrounds Lite by InoPlugs Web Design and Juwelier Schönmann 1010 Wien