The impossibility of constructing totally incentive-compatible institutions, whether organizationally or politically, entails a necessary divergence between subjective preferences and objective payoffs – a “noble lie”. This implies the existence of irreducible and irreconcilable “inside” and “outside” perspectives on social institutions; that is, between foundationalist and functionalist approaches, both of which have a long pedigree in political economy. The conflict between the two, and the inability in practice to dispense with either, has a number of surprising implications for human organizations, including the impossibility of algorithmic governance, the necessity of discretionary enforcement in the breach, and the difficulty of an ethical economics of institutions.