Investing in the Classics

Machiavelli’s Discourses on Livy: On Reordering

Please note that for the purposes of this analysis, I use the Harvey C. Mansfield and Nathan Tarcov translation of Machiavelli’s Discourses on Livy.

rsz_portrait_of_niccolò_machiavelli_by_santi_di_tito

Machiavelli discourses at length on the importance of establishing good foundations (see Machiavelli’s Discourses on Livy: On Good Foundations and The Prince: On Good Foundations), yet good foundations are not enough to withstand the test of time. Republics and principalities inevitably find that their orders and laws, having grown ancient, no longer suit the times.  Thus, republics need to be reordered or altogether renewed, according to their level of corruption. But a common theme in regards to reordering is the role that human nature plays. As Machiavelli states:

“men never work any good unless through necessity, but where choice abounds and one can make use of license, at once everything is full of confusion and disorder. Therefore it is said that hunger and poverty make men industrious, and laws make them good. Where a thing works well on its own without the law, the law is unnecessary; but when some good custom is lacking, at once the law is necessary” (Book I.3).

Men, Machiavelli asserts, never change their modes and orders unless necessitated. Thus, it is human nature to wait for a thing to become bad or broken before seeking a remedy for it. This theme is all too common in today’s practice of corporate restructuring. Thus, I liken Machiavelli’s commentary of reordering to that of corporate restructuring. I will also apply these lessons more generally, as it applies to any enterprise (i.e., one’s own fund or firm) or institution (i.e., public reform). Investors and individuals can discern many lessons from Machiavelli on this topic, especially the crucial distinction between reordering an uncorrupt enterprise versus renewing a corrupt one, and the implication for each.

 

Before delving into reordering, one must first understand Machiavelli’s distinction between corrupt and uncorrupt republics. As far as republics are concerned, corruption “arise[s] from an inequality that is in the city” (Book I.18). It is not inequality ipso facto that is the cause of corruption, for even while the Roman republic was uncorrupt it was not equal, but a particular kind of inequality that causes corruption. Later on, Machiavelli, in writing of the causes of the goodness of contemporary German, clarified inequality’s relationship to corruption:

“that those republics in which a political and uncorrupt way of life is maintained do not endure any citizen of theirs either be or live in the usage of gentlemen; indeed, they maintain among themselves an even equality, and to the lords and gentlemen who are in that province they are very hostile. If by change some fall into their hands, they kill them as the beginnings of corruption and the cause of every scandal. To clarify this name of gentlemen such as it may be, I say that those are called gentlemen who live idly in abundance from the returns of their possessions without having any care either for cultivation or for other necessary trouble in living. Such as these are pernicious in every republic and in every province” (Book I.55).

Corruption arises from ‘gentlemen,’ a title Machiavelli ascribes to landed gentry. These kinds of individuals are the source of corruption by their nature; wellborn and well-endowed, these gentlemen contribute nothing to the civic life being of the landed sort, as opposed to the industrious and uncorrupt patricians (e.g., wealthy guildsman and industrialists). Having no occupation to preoccupy them other than their sense of entitlement, they use their private wealth to purchase power to protect and promote their interests. Thus, they are pernicious to every society, and as such, Machiavelli lauds the Germans’ for the efficaciousness of their remedy.

 

The subsequent analogy, though not perfect, parallels that of corporate corruption in many ways. Just as Machiavelli’s gentlemen are complacent, idle, and entitled, many of the most common causes of corruption today share these attributes. Management and directors who are complacent, idle, and entitled are the most palpable and pernicious source of corruption. But these features can be extended to any entity of an enterprise that produces nothing but lives idly off of the abundance from the returns of the other entities. The other common cause of corruption not covered by this analogy, though certainly related to it, is that of bad laws and customs. As I see it, there are analogous, metaphorically speaking, to that of a bad balance sheet. For when a people is uncorrupt, which corresponds to a good business, but the laws are no longer good, then they can be reordered to suit the needs and capabilities of the republic, just as a bad balance sheet can be restructured to suit the debt capacity of an enterprise, either in-court or out-of-court.

 

When a republic is not corrupt, it is reordered with greater ease. While this is not and should not be surprising, Machiavelli’s remedy is worth further examination. Following the examples of the contemporary German cities and that of the ancient Romans, Machiavelli states that there is no better and necessary remedy than to kill the sons of Brutus – a reference to not to Marcus Junius Brutus, the famous assassin of Caesar, but to the much earlier Lucius Junius Brutus, the father of Roman liberty. This Brutus led the overthrow of the tyrannical rule of the Tarquin monarchs, and established the Roman Republic. Then, when his own sons plotted to betray the fledgling Republic and restore the old order, Brutus sat in judgment on them and sentenced them to death for conspiring against the fatherland. Thus, Machiavelli writes:

“there is no remedy more powerful, nor more valid, more secure, and more necessary, than to kill the sons of Brutus… For the one who has the few as enemies secures himself easily and without many scandals, but he who has the collectivity as enemy never secures himself… So the greatest remedy he has is to seek to make the people friendly to himself” (Book I.16).

In killing the sons of Brutus, a euphemism for young, ambitious gentlemen, one is able to keep a republic uncorrupt. Moreover, in doing so one wins over the favor of the people because they are saved from the oppression and offenses that they would have suffered at the hands of the sons of Brutus. Thus, having eliminated one’s enemies and secured the collectivity to your cause, it is not difficult to institute further reform, if necessary. It is not possible to overcome these sons of Brutus with humanity, as Piero Soderini deceived himself into believing, for “whoever makes a free state and does not kill the sons of Brutus, maintains himself for little time” and “through not knowing how to be like Brutus, [Piero] lost not only his fatherland but his state and his reputation” (Book III.4).

 

While this measure seems draconian, on closer examination its application is apposite. In his “Psychology of Leadership” interview at Harvard, Klarman ended up firing a brilliant, but ultimately problematic analyst. This analyst in question was unquestionably a ‘son of Brutus’ as someone, despite their natural talents, was more disposed to despoil than to further his firm. In the practice of corporate restructuring, eliminating the sons of Brutus (i.e., bad management or parasitic entities) in an otherwise uncorrupted republic (i.e., good enough business) provides an excellent opportunity for superior risk-adjusted returns, assuming that there was sufficient discount before the enterprise was reordered. As Machiavelli says, “if a prince seeks the glory of the world, he ought to desire to possess a corrupt city – not to spoil it entirely as did Caesar but to reorder it as did Romulus. And truly the heavens cannot give men a greater opportunity for glory, no can men desire any greater” (Book I.10). In this way, the astute distressed investor would eliminate his enemies and win the favor of other creditors (or shareholders) and the employees of the enterprise, assuming that the ineptitude of the sons of Brutus was widely known as is most often the case. With no enemies and many allies, the ability to reorder other laws and customs is conducted with greater ease.

 

The first problem incurred in dealing with corrupt cities is the increased scope of the problem.  Machiavelli cites the Roman republic, when orders and laws made in the early days of a republic when men were good, no longer served their purpose when they become wicked. He cites the example of the Roman custom by which the office of the consulate was not awarded but asked for, which worked magnificently when the Roman people were virtuous and would only ask for it if they judged themselves worthy of it, became most pernicious when they became corrupt because those who wanted more power would ask for it, which those of virtue abstained out of fear. Thus, the Romans “came to this inconvenience not at a stroke, but by degrees, as happens with all other inconveniences” (Book I.18). Similarly, in the practice of corporate restructuring, debt can be reasonable in an uncorrupt enterprise; but when the enterprise becomes corrupt, the debt burden becomes unbearable, and the costs of financial distress accelerate the corruption. Additionally, one might consider, that it is far easier for a corrupt management to ruin a good enterprise than a bad one, for the opportunity and mechanisms afforded are much greater, contrary to those individuals who believe they can find enterprises so good even an incompetent could run them. Thus, Machiavelli teaches us that it is not enough to just reorder the orders and customs, but one must clean up the corruption as well, for no good foundation can be laid where corruption exists.

 

The second problem incurring is that in a corrupt city, as opposed to an uncorrupt city, one cannot remedy inconveniences through ordinary means. As Machiavelli writes, “But because these orders have to be renewed either all at a stroke, when they are discovered to be no good, or little by little, before they are recognized by everyone, I say that both of these two things are impossible” (Book I.18). Machiavelli rejects the idealist fantasy that one can recognize corruption from afar so as reorder it under the radar, little by little. This harkens to Machiavelli’s rather apt assessment of human nature: that is, “men never work any good unless through necessity, but where choice abounds and one can make use of license” (Book I.3) and “Weak men govern themselves otherwise, because they grow in vain and intoxicated by good fortune by attributing all the good they have to the virtue they have never known” (Book III.31). As Machiavelli writes:

“For if one wishes to renew little by little, the cause of it must be someone prudent who sees this inconvenience from very far away and when it arises. It is a very ease thing for not one of these [men] ever to emerge in a city, and if one does emerge, that he never be able to persuade anyone else of what he himself understands. For men used to living in one mode do not wish to vary it, and so much the more when they do not look the evil in its face but have to have it shown to them by conjecture” (Book I.18).

In order to reorder a corrupt republic before the corruption is manifest and manifold, it requires a prudent individual to recognize this inconvenience from afar. Not only are such prudent individuals rarely found in a corrupt republic, but even if by some good fortune they exist, their warnings will not be adhered. Machiavelli points out, most men, especially weak ones (who comprise the majority, by far), will always enjoy prefer the fickle fruits of fortune and the liberty for license, unless necessitated to the contrary. But by the time necessity comes, it is already too late for such reforms. Investors need not look far for a myriad of examples in favor of Machiavelli’s assessment. Perhaps the most apt instance that comes to mind is that of Paul Singer’s warning of impending financial market failure in April 2007 at the G7 finance ministers meeting, where it fell on tin ears.

 

Next, Machiavelli evaluates the other option, that of reordering at stroke. This mode is also useless, he asserts, if one wants to maintain it as a republic. The first difficulty resides in the fact when the corruption is manifest and manifold, it cannot be remedied by the ordinary institutions for such ordinary modes are no longer good, but are themselves corrupt. Thus, the only remedy is to resort to extraordinary means. Machiavelli continues:

“As to innovating these orders at a stroke, when everyone knows that they are not good, I say that the uselessness, which is easily recognized, is difficult to correct. For to do this, it is not enough to use ordinary terms, since the ordinary modes are bad; but it is necessary to go to the extraordinary, such as violence and arms, and before everything else become prince of that city, able to dispose it to one’s own mode” (Book I.18).

Extraordinary means, Machiavelli states, are the only recourse in corrupt republics. Indeed, it is necessary if one wishes to cure its corruption. For corrupt republics cannot maintain themselves, as Machiavelli says “For a people into which corruption has entered in everything cannot live free” (Book I.16) and “where there is so much corrupt matter… the laws are not enough to check it” (Book I.55), which is Machiavellian parlance for the inevitability of succumbing to the dominion of a prince or tyrant. Extraordinary means allow one to uncorrupt one faction of the city at the expense of another. In this way, it is more so a renewal rather than a reordering, for the reformed republic is more different than similar than that which it comes out of. Thus, Machiavelli asserts “that he who wishes to make a republic where there are very many gentlemen cannot do it unless he first eliminates all of them” (Book I.55).

 

Machiavelli cites the examples of the Spartan kings Agis and Cleomenes to illustrate the necessity of extraordinary modes in corrupt republics. Agis, realizing how the aristocrats had corrupted the city and its liberty by the private power they accumulated with their wealth, sought to reorder Sparta by ordinary means. He proposed that Sparta renew the laws of Lycurgus, which responsible for so much of that city’s ancient virtue by instituting the complete and undivided allegiance to polis over private interest. Such a renewal would, in effect, deprive the aristocrats of their wealth; so for this offense, they killed this attempt and Agis along with it. Having succeeded Agis on the throne, Cleomenes “knew that he could not do this good alone for his fatherland unless he alone were in authority since it appeared to him that because of the ambition of men, he could not do something useful to the many against the wish of the few” (Book I.9). Thus, in order to avoid being ruined like Agis and to avoid the ruin of his fatherland, he took a convenient opportunity to have all of the aristocrats killed. Then he was able to renew the laws of Lycurgus, a “decision that was apt for making Sparta rise again and for giving Cleomenes the reputation that Lycurgus had” (Book I.9). This deed earned the rare Machiavellian title of “just and praiseworthy” (Book I.9).

 

Contrary to the case of Brutus, Cleomones had to eliminate all of the sons of Brutus in Sparta, instead of a select few. This is because Sparta was corrupted by the gentlemen, whereas “the Roman people was not yet corrupt when it recovered its freedom” (Book I.16). The laws were good in the early Roman republic, thus Brutus was able to resort to ordinary means and have only those directly involved in the conspiracy legally tired and judged. The connections to our times is readily apparent. Indeed, one could, with great ease, set his sights upon the corruption of Wall Street and quickly grasp how futile efforts have been to reform this institution. Because attempts have been made through ordinary modes, and these ordinary modes being themselves corrupted by this institution, they have no more curbed the pillaging and plundering of Main Street than they have pressured it; pushing it to go deeper under the skin by necessity to preserve itself by private means, making its effects more pernicious and perilous. As Machiavelli says, “for neither laws nor orders can be found that are enough to check a universal corruption” (Book I.18). These sons of Brutus are left without comeuppance. The only time that any reordering occurs is after extraordinary events, such as a financial crisis, but even yet the transgressors are not tried, but slapped on the wrist (at most).

 

But I digress. Returning to the matter at hand, one sees that in a corrupted enterprises, extraordinary measures are necessary. In the practice of corporate restructuring, I do not mean illegal measures, but measures that are not ordinary in the course of uncorrupt restructurings. When the enterprise is broken, as some publishing business are, it is better to liquidate then to “live in continual anxieties” (Book I.10) by trying to reorder a thoroughly corrupt enterprise. Indeed, when one sees how those publishing businesses have continually returned to bankruptcy and distress, and how much capital was misallocated into reordering them into something they could not be, a prudent investor would have realized how much better it would have been to liquidate them at the beginning. Similarly, when a whole enterprise is corrupt except for a single, smaller entity, it is more prudent to extricate the profitable unit and to abandon the former. For the sake of brevity, I shall leave out reasoning on other extraordinary measures, but conclude thus: that extraordinary measures are just for those to whom it is necessary, and these modes are pious for those to whom there is no hope save in such modes. That one should not fear from committing a small injury for the sake of a greater good, especially when abstaining allows a greater evil to persist.

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