By Peter T. Leeson, BB&T Professor for the Study of Capitalism at George Mason University.
Gypsies believe that the lower half of the human body is invisibly polluted, that supernatural defilement is supernaturally contagious, and that non-Gypsies are spiritually toxic.
Far from irrational, these superstitions are central to Gypsies’ system of social order. Gypsies can’t rely on government-created legal institutions to support cooperation between them. Many of their economic and social relationships are unrecognized or illegal according to state law. Yet Gypsies’ need for law and order is as strong as anyone else’s.
To provide such order, Gypsies leverage superstition. Consider Gypsies’ belief that non-Gypsies are spiritually toxic and that supernatural toxicity is contagious. Unable to use government to prevent cheating, Gypsies must use the threat of ostracism to prevent socially destructive behavior.
The problem is that Gypsy societies are tiny islands in a sea of non-Gypsies. Ostracism isn’t much of a punishment if ostracized Gypsy cheaters can integrate and interact with the larger outside society. To give the threat of ostracism “teeth,” Gypsies cultivated a strong belief that outsiders are supernaturally polluting, that their pollution is contagious, and thus that interacting with outsiders would supernaturally contaminate them too.
Under this belief, the threat of ostracism is serious indeed: cheating cuts one off from all social contacts. This deters Gypsies from socially destructive behavior. Perhaps unexpectedly, Gypsies’ superstition promotes law and order.
We often look down on the superstition of “others,” such as Gypsies. But Europeans also have a rich history of superstitions, some of which may also have been socially productive. When medieval judges were unsure about a criminal defendant’s guilt or innocence, they ordered him to undergo an ordeal. In the hot water ordeal, for instance, the defendant was asked to plunge his hand into a cauldron of boiling water. If the defendant’s arm showed signs of severe burning or infection three days later, the court convicted him. If his arm showed no such signs, the court exonerated him. These ordeals were based on a superstition according to which God performed a miracle for innocents, permitting them to escape trial by fire unscathed.
As in Gypsies’ case, what appears to be an irrational belief on the surface, on closer inspection, is socially productive. Confronted with the specter of boiling their arms at ordeals, guilty defendants would always decline them. They believed in the superstition according to which God exonerated the innocent and convicted the guilty through ordeals. So they expected to be burned and then convicted if they went through with them. Better to fess up or to settle with their accusers instead.
In contrast, innocent defendants would always want to undergo the ordeal. They also believed in the superstition that underlaid ordeals. So they expected God to prevent their arms from boiling, and thus to exonerate them, if they went through with them. Innocent defendants had nothing to fear from undergoing the ordeal. So they were willing to undergo them.
Since only guilty defendants would decline an ordeal and only innocent ones would undergo one, judges learned whether defendants were guilty or innocent by observing how they reacted to the specter of the ordeal. Medieval citizens’ superstitious belief facilitated criminal justice and, with it, law and order.
This isn’t to say that all superstitions promote law and order. They don’t. But we shouldn’t dismiss the possibility that some bizarre, scientifically unfounded beliefs may actually improve social cooperation by substituting for institutions of government where those institutions don’t exist or work well. Which superstitions in developing countries are in this category?
 For a comprehensive economic analysis of Gypsy superstition see, Leeson, Peter T. 2010. “Gypsies.” Mimeo.
 For a comprehensive economic analysis of medieval judicial ordeals see, Leeson, Peter T. 2010. “Ordeals.” Mimeo.