Hegel now moves to his third division in the discussion of Spirit: the immediate form it takes in the world, the "form it takes in actuality." This form is "the material in which the rational end-goal is to be realized." In a basic sense, Hegel says, this material is simply the human subject (or subjectivity in general)--human knowing and willing bring Reason into existence in the world. Unlike Spirit itself, human will is dependent on external things. Nonetheless, it "moves among essences, and has the essential itself as the goal of its existence."
With participation in both particular passions and abstract essences, humans set up the State (a product of the conjunction of these two aspects of the human, the subjective will and the rational will). The state is an "ethical totality," in which human individuals are free precisely in as much as they recognize the universal (as embodied in the principles and laws of the State).
Hegel is careful to point out that this idea of the State as true freedom (freedom in Reason) is not the same as the "social contract" model of the state, in which individual freedom is limited in order to allow others equal freedom. The freedoms limited by the State, Hegel argues, are nothing more than "caprice," simply the careless whims of the subjective will. The State allows the "only genuine ethical life," because genuine ethics only come from freedom in Reason (rational freedom).
World history, Hegel says, is only concerned with peoples who formed states. Any "value" and any "spiritual reality" is through the State alone, because the State is a direct embodiment of the "rational essence" of a given people; it is the essence of a people in a form that is "objectively there for them as knowers." In that sense, the State allows for self-consciousness, both of its people, and, through them, of Spirit. Thus, the State is also the realization of the Spirit in the world, "the divine Idea as it exists on earth," the thing in which "freedom gains its objectivity."
Ideally, the State eliminates any true conflict between the subjective needs of its people and the rational laws that govern them. In the State, "the rational is the necessary," and the subjective and objective wills exist together in it as a "serene whole."
Although Hegel leaves it to the "philosophy of right" (Hegel's own philosophy of ethics) to cover the details of the structure of the State, he discusses two "current" errors in the idea of the State. The first has already been mentioned: the idea that humans are naturally free and that the State limits that freedom. Hegel argues that "freedom does not exist as an original and natural state," and that the popular idea of an original, paradisiacal "state of nature" is incorrect. The State only limits the crudest of human drives, "caprice and [animal] passion." The initial limiting of these drives, in fact, is part of the process by which humans become aware of rational freedom (with its universal essences of law) in the first place. Hegel laments that caprice is forever mistaken for freedom, whereas the limitation of caprice is actually a requirement of true freedom.