See also Nagel's 'Concealment and Exposure':
"Admittedly nonacknowledgment can sometimes also serve the purpose of deceiving those, like children or outsiders, who do not know the conventions. But its main purpose is usually not to deceive, but to manage the distinction between foreground and background, between what invites attention and a collective response and what remains individual and may be ignored. The possibility of combining civilized interpersonal relations with a relatively free inner life depends on this division.
No, the real work is done by leaving unacknowledged things that are known, even if only in general terms, on all sides. The more effective are the conventions controlling acknowledgment, the more easily we can handle our knowledge of what others do not express, and their knowledge of what we do not express. One of the remarkable effects of a smoothly fitting public surface is that it protects one from the sense of exposure without having to be in any way dishonest or deceptive, just as clothing does not conceal the fact that one is naked underneath. The mere sense that the gaze of others, and their explicit reactions, are conventionally discouraged from penetrating this surface, in spite of their unstated awareness of much that lies beneath it, allows a sense of freedom to lead one's inner life as if it were invisible, even though it is not. It is enough that it is firmly excluded from direct public view, and that only what one puts out into the public domain is a legitimate object of explicit response from others."
For example:
"At the same party C and D meet. D is a candidate for a job in C's department, and C is transfixed by D's beautiful breasts. They exchange judicious opinions about a recent publication by someone else. Consider the alternative:
C: Groan....
D: Take your eyes off me, you dandruff-covered creep; how such a drooling incompetent can have got tenure, let alone become a department chair, is beyond me.
The trouble with the alternatives is that they lead to a dead end, because they demand engagement on terrain where common ground is unavailable without great effort, and only conflict will result. If C expresses his admiration of D's breasts, C and D have to deal with it as a common problem or feature of the situation, and their social relation must proceed in its light. If on the other hand it is just something that C feels and that D knows, from long experience and subtle signs, that he feels, then it can simply be left out of the basis of their joint activity of conversation, even while it operates separately in the background for each of them as a factor in their private thoughts."
Followup to: Belief in Belief
One of those insights that made me sit upright and say "Aha!" From The Uncredible Hallq:
The power of real deception - outright lies - is easy for even us nerds to understand.
The notion of a lie that the other person knows is a lie, seems very odd at first. Up until I read the Hallq's explanation of Pinker, I had thought in terms of people suppressing uncomfortable thoughts: "If it isn't said out loud, I don't have to deal with it."
Like the friends of a terminal patient, whose disease has progressed to a stage that - if you look it up online - turns out to be nearly universally fatal. So the friends gather around, and wish the patient best hopes for their medical treatment. No one says, "Well, we all know you're going to die; and now it's too late for you to get life insurance and sign up for cryonics. I hope it isn't too painful; let me know if you want me to smuggle you a heroin overdose."
So even that is possible for a nerd to understand - in terms of, as Vassar puts it, thinking of non-nerds as defective nerds...
But the notion of a lie that the other person knows is a lie, but they aren't sure that you know they know it's a lie, and so the social situation occupies a different state from common knowledge...
I think that's the closest I've ever seen life get to imitating a Raymond Smullyan logic puzzle.
Added: Richard quotes Nagel on a further purpose of mutual hypocrisy: preventing an issue from rising to the level where it must be publicly acknowledged and dealt with, because common ground on that issue is not easily available.