Having dismissed punishment as the origin of bad conscience, Nietzsche offers his own hypothesis: bad conscience came about with the transition from hunter-gatherer societies to permanent settlements. All our animal instincts of life in the wild became useless, and, in order to survive, we had to rely on our conscious mind rather than our unconscious instincts.
Nietzsche suggests that instincts that cannot be released outwardly must be turned inward. The instincts of hunting, cruelty, hostility and destruction that characterized our pre-historic lives had to be suppressed when we entered into society. As a result, we turned all this violence in toward ourselves, made ourselves a new wilderness to be struggled against and conquered. In so doing, we developed an inner life and bad conscience. Nietzsche characterizes the war we wage against our own instincts as "man's suffering of man, of himself," and sees in this struggle the suggestion that "man [is] not a goal but only a way, an episode, a bridge, a great promise."
This assessment relies on the assumption that the transition into settled communities was a violent one, that it was forced upon the majority by a tyrannical minority: the "social contract" is a myth. Deprived of freedom, the majority had to turn their instinct for freedom inward upon themselves, thus creating the bad conscience. In so doing, they also created the idea of beauty and developed selflessness as an ideal.
Next, Nietzsche traces the development of the bad conscience beginning with the sense of indebtedness early tribe members must have felt toward the founders of the tribe. As the tribe became increasingly powerful, there was an increasing debt that had to be paid to these revered ancestors. Given enough time, these ancestors came to be worshipped as gods. As "the maximum god attained so far," the Christian God also produces the maximum feeling of guilty indebtedness. This debt cannot possibly be repaid, and so we develop the concepts of eternal damnation and of all people being born with irredeemable original sin. The genius of Christianity is then to have God (as Christ) sacrifice himself in order to redeem all our sins: God, the creditor, sacrifices himself out of love for his debtor.
Nietzsche suggests that not all Gods serve to reinforce bad conscience. While the Christian God is the focal point of bad conscience, self- torture, and guilt, the Greek gods serve as a celebration of their animal instincts, as a force to ward off the bad conscience.
Nietzsche concludes by suggesting that there might be a way out of the past few millenia of bad conscience and self-torture. If the bad conscience could be turned not against our animal instincts, but against everything in us that opposes those instincts and turns against life itself, we could turn consciousness toward an affirmation of life and against the "illnesses" of Christianity and nihilism.