Double Prehistory of good and evil The concept of good and evil has a double prehistory: namely, first of all, in the soul of the ruling clans and castes. The man who has the power to requite goodness with goodness, evil with evi, and really does practice requital by being grateful and vengeful, is called "good". The man who is unpowerful and cannot requite is taken for bad. As a good man, one belongs to the "good", a community that has a communal feeling, because all the individuals are entwined together by their feeling for requital. As a bad man, one belongs to the "bad," to a mass of abject, powerless men who have no communal feeling. The good men are a caste; the bad men are a multitude, like particles of dust. Good and bad are for a time equivalent to noble and base, master and slave. Conversely, one does not regard the enemy as evil: he can requite. In Homer, both the Trojan and the Greek are good. Not the man who inflicts harm on us, but the man who is contemptible, is bad. In the community of the good, goodness is hereditary; it is impossible for a bad man to grow out of such good soil. Should one of the good men nevertheless do something unworthy of good men, one resorts to excuses; one blames God, for example, saying that he struck the good man with blindness and madness
Then, in the souls of the oppressed, powerless men, every other man is taken for hostile, inconsiderate, exploitative, cruel, sly, whether he be noble or base. Evil is their epithet for man, indeed for every possible living being, even, for example, for a god; "human", "divine" mean the same as "devilish", evil. Signs of goodness, helpfulness, pity are taken anxiously for malice, the prelude to a terrible outcome, bewilderment, and deception, in short, for refined evil. With such a state of mind in the individual, a community can scarcely come about at all - or at most in the crudest form; so that wherever this concept of good and evil predominates, the downfall of individuals, their clans and races, is near at hand.
Our present morality is has grown up on the ground of the ruling clans and castes. (Friedrich Nietzsche, Human, All Too Human, Section 45)
An attempt at analysis
Some thoughts on what Nietzsche is trying to say in this passage:
Nietzsche is recommending a reevaluation of the words themselves. In the ancient world, goodness grew out of virtues such as strength, independence and valour; evil was spawned out of weakness and impotence. Goodness grew out of love, self-reliance and self confidence; the "good" man could deal with life's problems himself (i.e.: requiting good with good, evil with evil, and so on...). Evil, on the other hand, was born of suspicion, mistrust, and an inability to survive on one's own (among other things; however, the last of the three I mentioned is the most important, for it is this impotence which causes the weak to rely on the strong and have contempt for the strong man's ability to decide the weak man's fate).
The will to power is visible all over the place here. The good man of ancient times had power and exercised it, and the weak man did not - thus, the master/slave analogy. Ultimately, though, individuals of such heroic proportions as the good man were much fewer than the weak or evil men. The weak engaged in their own exercise of the will to power: by banding together into a community, they inverted the relationship and posited themselves as being good (for they knew pity, because they all desired it), while the strong became evil; since the power of the good could not be controlled by the evil any other way, they simply marginalized and excluded the good, and (as I have said) inverted the whole relation. It was a sort of protective barrier, yet it did not solve their problems, because they did not only mistrust the strong individuals, they mistrusted anyone attempting individuality. A look at medieval Christianity confirms this - accusations of heresy abounded, and unorthodoxy could result in death (A fictitious yet nonetheless absorbing account of this social phenomena can be found in Umberto Eco's The Name of the Rose).
Another key to the good/evil dualism is Nietzsche's assertion that our morality is that of ruling castes and clans. This, of course, holds true for the morality of the Homeric epics as well, but Nietzsche wants to say that those virtues are actually better than those of Christianity (more importantly "weak" Christianity, not the actual Morality of Christ, who was decidedly not a weak person if scripture is at all accurate). Again, this is the will to power - the ruling castes make sure that they remain the ruling caste by enforcing their morality and excluding everyone else. This is in clear opposition to the morals of the strong, which center around the Greek concept of agape and respect for others who deserve it. It seems to me that even though a community made up of the latter type of morality might work quite well, a strong person might not even need to be a part of a community and may very well be a Henry David Thoreau-type living out in the woods somewhere, independent of relying on others.
These are just some late-night reflections on this passage, but the main point here is that "good" and "evil" are tired, bloated terms that have been manipulated and abused over and over again. When Nietzsche talks about moving "beyond good and evil", he is not talking about becoming a destructive nihilist, he is talking about stripping away distorted meanings, renewing our view of morality, and hopefully coming up with something that works a little bit better than what we have now.