A sociological contribution to the general theory of consumption
and savings
The driving force behind this whole thesis comes from the idea that a sociological
perspective can substantially contribute to current academic debates in economics about
modelling the saving behaviour in households and vice versa. There are four potential
sociological contributions to explanation of saving behaviour: the notions of strategies, social
and cultural capitals, different types of economies and trust.
In this chapter I start with the sociological concept of strategy, which in my opinion can
be successfully applied to the problem of household consumption and savings. I discuss the
concept of a ‘strategy’ which is used in the literature and introduce the notion of a ‘saving
strategy’ in order to place emphasis on the idea that consumption smoothing in different social
contexts can be implemented by using different tools. The main focus is on the concepts of
cultural and social capitals developed by Bourdieu and Coleman and on the different types of
economies specified by Gershuny and Pahl, and the issue of trust and uncertainty.
The final section of this chapter is devoted to the detailed layout of the types of strategies
of smoothing consumption using different tools. I argue that one needs to take into account that
consumption smoothing may be implemented not with the help of financial or tangible savings
only. Social and cultural capital may accompany or even substitute for financial forms of capital
in the process of consumption smoothing, even though at first site investments in these forms of
capitals could be perceived as consumption.
The concept of a ‘strategy’
The notion of strategy is of direct interest to sociologists and other social scientists that
tend to consider peoples’ behaviour a result of their strategic planning. Crow brought
everybody’s attention to the fact that the term has been extensively used in many different
contexts (Crow, 1998). In sociology the term is widespread on all levels of analysis; for example,
one can speak of the variety of strategies in the context of economic policies of states or
strategies of different classes, strata, groups of people or single individuals. Sometimes strategies
are determined by the goals of actions (‘growth strategy’), at other times they are determined by
the type of agent (‘corporate strategy’) or sometimes by the performance of actions
(‘paternalistic strategy’).
This extensive use of the term makes us think of the sources of its availability. Quite
often the word ‘strategy’ is used just as a synonym for the term ‘action’, but it is unlikely that it
is the main advantage of the concept. Anderson, Bechhofer and Kendrick (Anderson, Bechhofer,
Kendrick, 1994) pointed out that this notion was brought into social sciences by Bourdieu,
Levine, Tilly, Anderson, Oppenheimer and Pahl in order to avoid extremes of structural
determinism and excessive voluntarism in finding explanations for the behaviour of people.
They use the assumption that agents, on the one hand, are able to exercise initiative by pursuing
their ends and choosing the appropriate means, but on the other hand, they are constrained in the
range of possible goals and expedients. The notion of strategy offers the possibility of taking into
account the interweaving of economic interests and social institutions and resolving the old-age
contradiction between the action and the structure while at the same time reconsidering the idea
of rationality.
.
To benefit from the advantage of this concept, one has to clarify it. There are different
definitions of what can be called a ‘strategy’ in literature. The term is widely used in game
theory which is concerned with how rational individuals make decisions when they are mutually
interdependent (Romp, 1997: 1). The game theory approach is based on the assumptions of
individualism, rationality and mutual interdependence of players in the game. A strategy is
defined as a complete description of how a player could play a game. And what is more
important it not just a description of all possible actions but a discussion of actions which are
dependant on what ‘he or she observes other players in the game to have done’ (Romp, 1997:9).
In recent years this theory being applied to different problems in economics has significantly
improved the understanding of economic behaviour. However, the game theory approach has
never been applied to saving behaviour of households. That is why I will not go any further in
describing this approach and will focus on sociological theories of strategic behaviour.
The above description of the strategy deals with individual strategies. The concept of
'household strategies' is discussed in Wallace’s paper on the conceptual relevance of this term
(Wallace, 2002). As she mentioned “household strategies’ was a concept used first of all in
studies of Latin America and Africa where the informal economy was at least as important as the
formal economy in understanding every day economic behaviour among the urban poor (Hart,
1973; Castells and Portes, 1989; Roberts, 1991)’ (Wallace, 2002: 275).
Being later used as a concept in empirical studies of economic change in Britain in the
1980s (Gershuny and Pahl, 1979, Gershuny, 1978, Pahl, 1980, Pahl, 1984, Wallace and Pahl,
1985), it was further developed in a number of sociological papers: in Crow’s article on the use
of this concept in sociological research (Crow, 1989), in Knights and Morgan’s note of dissent
(Knights and Morgan, 1990), in Anderson, Bechhofer, Kendrick’s chapter on individual and
household strategies in the book ‘The Political Economy of a Household’(1994).
In Crow’s opinion a strategy is a conscious, purposeful and long-term action (Crow,
1989:19). Knights and Morgan focus on the idea that strategic thinking and acting are
conditioned by power (Knights and Morgan, 1990). That is why in their opinion only powerful
agents are able to work out strategies. Referring to Bourdieu, Morgan emphasises the innovative
component in the concept of strategy and its ability to explain how particular patterns of
behaviour emerge and reproduce.
Anderson et al. stress the idea that ‘strategy’ must be distinguished from ‘behaviour’,
implying that ‘strategies are not behaviours or practices but systems of rationally grounded
decisions leading to desired medium- to long-term goals’(Anderson, Bechhofer, Kendrick, 1994:
21). This means that the concept of strategies is used in order to mark the ways in which people
plan and map their future more or less consciously in a changing world. In all mentioned
definitions, it is emphasised that a strategic action is marked as a long-term, goal-oriented,
conscious, innovative, resourceful and powerful action.
However, while being promising conceptually, the strategic approach turned out to be
rather ambiguous in empirical research. If one wants to identify strategies in real life, it is better
to be cautious and circumspect with all of these components. For example, when considering the
time horizon of actions, it is not clear how long long-term may be. Should it be comparable with
a lifetime, or should we consider ten, five, three or one year to be long enough? If a family has
been saving half a year for family holidays, can we consider these actions long-term? Perhaps
yes because holidays used to be a yearly event for most families, and that is why it is unlikely
that the horizon of planning will be longer than one year. So if all other characteristics of a
strategic action feature the requirement about long term duration of actions seems to be too
formalistic. But we can give a negative answer as well and prove it with the idea that it is
necessary for holiday savings to be regular over a period of a number of years in order to be
qualified as strategic actions. In that case its long-range character will again be considered basic.
Hence the question of how long the long-term action is does not have a definite answer and may
vary depending on the researcher’s preferences.
The ambiguity of the definition of length is also complicated by the fact that strategies
are not just only long-term repeated actions but rather attempts to structure the future in a
changing world. If this is so, strategies consist of a number of interrelated internal phases with
different types of actions. And if there is a transition to another strategy (or non-strategy) or a
move through the different phases within the same strategy, it is always not easy to identify. For
example, if a family has moved their savings from Sberbank to a commercial bank can we
identify this action as the same strategy, or not? It seems that it is possible give grounds for both
answers. We can present this action as another stage of adherence to bank depositing or separate
it into two different strategies because of the huge difcference between savings in a state bank
and savings in a commercial bank.
The above examples prompt us to focus not on the length of actions but rather on their
goals. Is it not a goal that constitutes a strategy? Let’s take for example a couple who wanted to
buy a house and had been accumulating money resources for it. Let us suppose that a couple
years later, this family decided to continue saving, but this time it was for an apartment instead
of a house. Would that be a change in strategy? Maybe not because a researcher may say that
there is too little difference between these two things – both are real estate property. But if this
family later changed its mind once again and decided to rent a house, what can we say then?
Now we may say it is another strategy, that they are not going to buy; they are going to rent –
there is a big difference between these two financial actions. But there is also a big difference
between living in a house and living in an apartment. Why did not we take this into account
earlier? And we can also say ‘no’ again: the aim is to solve the problem of housing, and actually
nothing has changed yet because the family is still saving. But what does this mean? Is the
purpose of saving not important? Or is the concept of strategy flexibility enough to prove
whatever we want?
And how can we interpret the case where changes in motivation have not caused
corresponding modifications in actions performed? Let us assume that a family at some point
was carefully watching over all offers on the financial market, looking for information, making
comparisons among different options and making decisions on the preferable forms of savings.
A couple of years later the family was still using the same financial tools, but at that time its
preferences had become rather a habit than the result of a rational estimation of market options.
Is it still worth considering these actions as strategic? Or maybe it is better to admit that habitual
behaviour is out of the strategic domain. Again both answers seem to be valid; usually habits are
persistent, thatt is why they may be considered strategies. But there is also the case against this –
habitual behaviour has little in common with rationally grounded decisions made with long-term
goals in mind.
This is one of the crucial issues in the conceptualisation of the strategic approach – how
to deal with routine behaviour. If it is labelled strategic behaviour because of its persistent
character, there will not be a lot left to be viewed as non-strategic. If routine is considered
beyond strategic behaviour, we face the problem of how to distinguish conscious selection of
ends and means from imitation of already proven patterns of behaviour, which is often nonreflexive. For example, the traditional or habitual way of behaviour may be proved as optimal
from an economic point of view, and in this case it is unlikely to be distinguished from the
strategic one as culturally or structurally determined behaviour. If we look at the behaviour of
retired people in Russia, we may not be able to differentiate if the reason they keep their savings
in Sberbank is because they do not know about other financial possibilities (or maybe they do
not know how to use them) or because they consider Sberbank’s offer to be the best one among
all others. To attempt to find the way out, one must consider an innovative capacity of action to
be the important distinction of a strategic behaviour because it is exactly the inability or
reluctance to see and estimate the new possibilities that characterises a non-strategic action
versus a strategic one. But unfortunately there is no strict conformity between innovative and
strategic actions because intuitively we feel that strategies are not always innovative.
The important component of a strategic approach deals with agents’ motivations. It says
that it is necessary not only to look at the performance of action but also at its underlying
motivation. Similar behaviour may be guided by different motives, and only by taking them into
account can we understand the behaviour itself. However, it is not clear how we can be made
aware of reasons behind actions. Direct questioning has its limits. People may have one way of
thinking, another mode of presenting those thoughts to an observer and live their real life in a
third way. Anderson at al. also brings up the question of how to take into account people’s
motivations and understanding actual motives.
‘Strategies we take to be more generalized than plans, general prescriptions which actors
take into account when making plans within structural constraints. Actors may not
themselves refer specifically to strategies; we infer their existence from the accounts they
give to their plans” (Anderson, Bechhofer, Kendrick, 1994: 21).
This means that in our investigation of motives, we cannot rely on either direct measurement of
incentives or mere inference them from behaviour. We have to think about the indirect
procedures of investigation into people’s motivations.
And lastly, if we are dealing with plans for the future, the problem of their feasibility
arises, which is also a tricky question. Can a plan be referred to as a strategy if it is not possible
to carry out the plan? And how can we estimate the chances that it will be done? If somebody
has failed to accumulate money to buy a house by placing his money into a financial bubble,
does it mean that he/she had no strategy? No, we would rather say that he had a strategy, but he
failed to accomplish it because his strategy was risky. But if somebody has decided to bury his
money expecting it to grow into a tree with golden leaves, we may say it was not a strategy but
rather a dream. But the problem is that both actions are basically similar, and on the other hand,
all innovative ideas looked like a dream at some time, so logically we should not refuse
Pinnocio’s financial strategy just because it does not look feasible now.
Consequently, there is a lack of possibilities to sort behaviour into groups of strategic and
non-strategic actions by looking at the outward characteristics of behaviour itself. There is also a
problem with the strategy of non-strategic behaviour. It is definitely feasible and reasonable not
to be strategic if one thinks about unintended consequences of her/his actions, so being nonstrategic also may be a sort of strategic decision. Taking all these doubts into consideration, it
seems that the given definition of a strategy is not going to work well in empirical investigations.
First of all, it is because the definition is too loose – almost all existing actions including nonstrategic (since one may have a strategy to have no strategy) can be presented as strategic
depending on the personal preferences of the researcher.
Empirical research on household strategies in transition countries was focused on the
investigation of ‘survival’ or ‘coping’ strategies (Walker, 1998; Rose and Haerpfer, 1992;
Bridges and Pine,1998; Piirainen,1997; Kolankiewicz, 1996). Most of them were interested in
how households have combined different types of resources and applied them in formal and
informal economies in order to survive. As a result of their investigations the researchers
developed different classifications of household strategies.
Rose and Haerpfer (1992) classified the households into ‘defensive’, ‘enterprising’,
‘marginal’ and ‘vulnerable’ types. Kolankiewicz revealed ‘market-oriented’, ‘traditionaldefensive’, and ‘proletarian’ strategies. Researches were interested in how different social groups
survive in the situation of rapid social change. However, the types which they arrived at, in my
opinion, tell more about the ideological reflection on a specific situation of the transition rather
than about the behaviour of households. Their approach is based on the neo-liberal assumption
that post-communist countries are inevitably moving forward from communism to market
capitalism. Whereas changing the perspective may modify the labelling of these types of
strategies. If for example, in contrast to conventional liberal wisdom one sees the informal
economy as a reaction of market forces against the corrupted domain of formal economy where
social privileges of a few are maintained at the expense of the many (Hart, 1973; De Soto, 1986),
then labelling the strategies of households as traditional-defensive or marginal may be
considered rather disputable.
What can be done about this? I think that the conceptual basis for this concept may be
strengthened if we, firstly, focus our attention not on the distinctions between strategic and nonstrategic behaviour but on different patterns of strategic decision-making. Different institutional
contexts give rise to different rationalities which should not be considered universalities of
human nature but socially constructed patterns of behaviour. Secondly, it is better to avoid
classifications which are based on politically stained concepts, however, it seems that it is
impossible to escape subjectivity in this field entirely. That is why the main focus of a researcher
is to reveal connections between the patterns of behaviour and the subjective meaning people
attach to their actions – the realm of options they see and the edge of constrains they feel.
Comparison between different patterns of behaviour and their subjective justifications will
probably allow us to find out which particular aspects of institutional contexts may be
responsible for them.
Sociological contribution to the economic theory of consumption smoothing: social and
cultural capitals, self-service economy and trust
The basic idea of the neoclassical theories of consumption and savings is that savings
cannot be explained by current income alone. If consumption decisions are made by households
in order to maximise utility over time and taking into account the amount of overall wealth of a
decision unit, the estimation of that overall wealth becomes crucial. In standard economic
models, it is commonly accepted to refer to human and non-human wealth as an approximation
of the amount of overall resources.
However, households, especially in times of uncertainty, fragility of financial institutions
and systemic risk, may count on different types of resources. They can consider their network
ties and personal contacts and different personal skills1 as potential or actual means for raising
funds in difficult times. Social and cultural capital may accompany or even substitute financial
and human capital in the process of consumption smoothing. Social networking or ‘investing’ in
the embodied skills to earn money in difficult economic circumstances may begin to be
considered more attractive than saving money with the help of objectified (external) financial
instruments like bank deposits or securities, which hold the risk of being damaged.
‘Investing’ strategies are placed inside quotation marks because money savings does not
create social and cultural capitals. On the contrary, these types of capitals are accumulated
during actual consumption. That means that activities people are used to being engaged in as a
part of their everyday consumption increase their earning capacity in hard times of systemic
crises, and are used to derive income in order to keep the marginal utility of consumption
constant. That is why, in spite of the fact of excessive sensitivity of consumption to incomes, the
strategy of consumption smoothing does not disappear. When uncertainty and fragility of the
1
apart from educational degree and professional experience
financial system are reduced, people again tend to use financial savings to smooth their
consumption. Social capital is also used for consumption smoothing. Even though people invest
in external networks, these networks are not as objectified as financial assets since they are
partly rooted in the embodied qualities of individuals who participate in the networks.
Economists use the notion of ‘capital’ as the main theoretical concept to describe the
central principle governing the economy. Bourdieu assumes that the usage of this term can be
broadened if one applies it to the entire society rather than only to its economic component
(Bourdieu, 1986, 1990). Non-economic forms of capital by analogy with the economic forms can
also be accumulated, depreciated and converted into money. Bourdieu argues that the
introduction to these multiple forms of capital will help in understanding the structure and
functioning of the social world because they capture the sociological idea that non-financial
resources, such as power, prestige and social status, as well as financial assets can be converted
into economic capital, i.e., money. ‘The social world is accumulated history, and it is not to be
reduced to a discontinuous series of instantaneous mechanical equilibria between agents who are
treated as interchangeable particles’ (Bourdieu, 1986: 241). The atomised model of a player who
seeks optimization in a decoupled series of games is not going to work well because one has to
take into account the social inertia and the influence which the past exerts upon the future –
giving opportunities or/and limiting choices for future decision-making. Capital is always
unevenly distributed. Some individuals are endowed with a larger amount of resources than the
others.
Bourdieu introduces the notion of cultural and social forms of capital, which, along with
capital in the economic form can be converted into money. Capital can be inherited, but a lot
depends on the ability of the individual to handle it. The concept of cultural capital refers to
family social class background and investments in and commitments to education. While
studying students’ educational achievements, Bourdieu found that what had been previously
attributed to individual talents and efforts turned out to be heavily influenced by the family social
background which is passed on from one generation to another. ‘Talent’ proved to be primarily
determined by the time and cultural capital invested in the students by their parents.
In order to define what cultural capital is, Bourdieu introduced the notions of embodied,
objectified and institutionalized states of capital. Embodied state capital is inseparable from the
individual; it exists as an integral part of the person, embodied in the habitus. Objectified state
capital is seen in material objects created by the individual: paintings, writings, monuments, etc.
Cultural capital is transmissible; however, its real appropriation cannot be completed without
cultural capital in the embodied state that allows the possibility of decoding symbols
incorporated into the material cultural objects. The institutionalised state is defined as a title, an
institutional recognition of the particular level of qualification or academic credentials. These
academic qualifications are used as a rate of conversion between cultural and economic capital.
Bourdieu links social capital to membership in a group or a network. The level of social
capital can be measured by the amount of recourses held by the group and by the size of the
network one can effectively mobilize. Convertibility into money is implemented by the group or
network members’ access to the resources by other group members on the basis of solidarity.
Membership cannot be nominal; it has to be practical, and one needs to ‘invest’ time, money and
effort to be allowed into the group. Accumulation of non-economic capital is linked to the usage
of economic capital. However, in contrast to the later accumulation of any form of capital, noneconomic capital is spread out over a longer period of time, and it is difficult to forecast its
results. For example, deals made on the basis of social capital are not formally arranged and take
the form of reciprocity.
The importance of networks for Post Communist countries was emphasised in Sik and
Wellman (1999). In their article Network Capital in Capitalist, Communist and Post-Communist
Countries the authors argued that in Post-Communist countries the role of network capital is
higher than in the developed countries of Western Europe and North America. What is more, in
their opinion, in the post-communist period people in these countries rely on networks even more
they had done under communism. They argue that network capital is useful for both: for coping
with negative income shock as well for grabbing opportunities. They illustrate this statement
with the data collected in a small town in South-Eastern Hungary. Households in that town rely
on reciprocal exchanges not only to deal with problems that are emergencies, but also when they
plan their actions in advance, for example, to build their own houses housebuilders borrow
money from other households and receive help for the many phases of the work to be done. If
so, investing in network capital can be considered as rational choice.
Another sociological theory which elaborates on the idea of the social embeddedness of
economic action and calls for taking into account the processes that take place outside the formal
sphere of economic production and formal rationality can be found in Jonathan Gershuny’s
typology of economy. He and his colleagues were pioneers in this area while studying
informality (Gershuny, 1978, Pahl, 1980, Pahl and Wallace, 1985). Unpaid work and leisure time
are usually ignored in economic theories, even though what is happening during that time
significantly influences the economic activity of individuals. The concept of ‘work’ was given a
broader definition and included not only paid work but also domestic work and selfprovisioning, the principle goal of which is to reduce the dependence of household consumption
on market goods and services.
The most important ideas of the studies done by Gershuny and Pahl influenced my recent
research. First of all, I shared their idea to look not only for structural factors that inevitably
mould households’ behaviour but also for their subjective interpretation and active strategising.
Second of all, the idea of looking at the modification of household strategies during different
stages of social change was also included. Third, the service economy thesis reveals the failure to
measure the final consumption of "services" when taking into account pay services only.
Finally, one of the most important concepts that can help to understand saving behaviour of
households is the nature of trust. The concept of trust has got a rich and continuous tradition in
sociology, represented by Tonnies, Simmel, Durkheim, Parsons, Luhmann, Gambetta, Coleman,
Giddens, Beck, Hardin, Fukuyama, Sztompka, Putnam and many others. However, I will focus
only on the comparison between personal and impersonal trust which I think can be useful for
understanding of saving behaviour of households.
The main idea is that trust can explain behaviour in the situations that are characterised by
uncertainty: we judge how to act on the basis of the trust we have in others. These ‘others’ may
be of two types: individuals or institutions. In economic sociology there is a widespread opinion
that market economies are based on institutionalised trust which means that actors trust the rules
of the ‘game’, even take them for granted. In this view, trust is a set of expectations shared by all
actors involved in the exchange. If market and financial system is taken for granted and
perceived as such individuals or households may develop their saving strategies accordingly to
this environment. In classical sociology the difference between modern and traditional societies
is associated with these two types of trust: modernity is based on trust to institutions, impersonal
expert systems and monetary symbols, whereas traditional society - on trust to individuals which
belong to your family or community. The differences in expectations and behaviour that result
from the differences in the systems based on different types of trust are described by Parsons and
Shils (1951) with the help of the typology of the pattern variables.
In contemporary economic sociology there are at least two different approaches to deal with
institutional trust. One way is to consider institutional trust as a prevailing form in the market
economy. However, this type of trust is not unique and it is supplemented by trust to individuals
and their networks. Even though personal trust can never fully substitute for institutional trust in
market relations, participation in networks can have positive consequences for individuals in the
most kinds of economic transactions. An example of such approach can be found in
Granovetter’s Getting A Job (1974) which is considered as the most successful network study.
Another way to think about institutional trust comes from the neoinstitutional analysis of
markets. According to Fligstein (1996) network analysis fails to consider the role of politics in
the market. This approach shows how rules which create stable markets are socially constructed.
Fligstein points out that states create the institutional condition for markets. These institutions
are contested and powerful actors undertake their construction as a political project. Since the
purpose of powerful actors is to create and maintain stable worlds, they develop and spread
understandings which structure perceptions of how a market works and how the actors interpret
the world and their own actions. What is important here is that stability of markets is based on
the legitimacy of the state and powerful actors to introduce and maintain rules and vice versa the
state and powerful actors are seen as legitimate if they are able to maintain stability in the
markets. The result of it is that dominant groups become more interested in maintaining stability
of rules even in cases when the rules are not fully equitable to the interests of the powerful
actors. The Russian case is interesting in this respect because it gives an example of existing
market with a deficiency in trust in institutions when rules are manipulated in favour of powerful
players and financial institutions do not fulfil the roles which are set by the rules.
The main consequence of the situation when market is not perceived as an impersonal force
for financial strategies of actors is that their actions have the short-term horizon and there is the
uncertainty about the preservation of accumulated assets within the long periods of time which
discourage savings and encourage consumption. This kind of motivation can be found
everywhere across all levels of the social hierarchy: if private property is not secured and can be
expropriated when the rules are changed there is lack of motivation to save and to invest.
Types of household saving strategies
The main distinction of the emerging analysis of household saving behaviour consists in
revealing the different types of household saving strategies, which may be found in times of
higher levels of uncertainty about future incomes and lower levels of trust in financial
institutions. The excessive sensitivity of consumption is a puzzling fact in transition economies.
The basic idea that I am going to use in the explanation is that the rational strategy of smoothing
consumption with the help of financial savings can become a popular strategy of households in a
situation with a low level of uncertainty of future personal incomes and a high level of trust in
financial institutions.
If trust in financial institutions is low, households smooth their consumption with the
help of non-financial forms of savings, such as buying durables or making in-kind provisions for
the future. These kinds of strategies of smoothing consumption are popular in the developing
countries with seasonal agricultural production.
If uncertainty of future incomes is high and there is little trust in financial institutions,
one might find it more appropriate not to save but to ‘invest’ time or money in developing his or
her ability to earn money in difficult times. For example, retirees may think about working
strategies after retirement that can allow them to be better off than if they saved money for
retirement in banks or shares, which are subject to distortion in unstable economies. An
unemployed teacher could earn some money by working as an unofficial taxi driver, or maybe he
or she could be a tennis coach, employing the skills he or she has developed through
consumption practices. The more skills a person has, the higher his or her ability is to make ends
meet in hard times, especially in situations when there is a lack of public safety nets.
The skills that may help people overcome a negative income shock may not demand
special ‘investment’ strategies of acquiring additional skills or education which may be
‘stockpiled’ for rainy days. Normally people cannot obtain the appropriate level of expertise
through education all in itself. They need to practice and employ their skills in order to develop
the ability to use them. That is why the reserve they have, in my opinion, is accumulated in their
consumption patterns rather than educational degrees. Activities people previously engaged in as
part of their everyday consumption can increase their earning capacity in hard times
Using this approach I propose a number of competing explanations of the excessive
sensitivity of consumption to the current income in Russia.
The first group of hypotheses states that Permanent Income Hypothesis/Life Cycle
Hypothesis works but in a way that reflects the specific features of the Russian transition.
Russians are rational in the same way as Western Europeans or Americans, but in the face of
market imperfections, they temporally deviate from the ‘proper’ model behaviour. When those
imperfections pass, the consumption patterns of Russian households (including consumption
smoothing) will return to the standard path observed in developed market economies.
In this respect, a number of imperfections in transition economies can be mentioned:

Low personal incomes

Liquidity constraints

A lack of trust in financial institutions and a shortage in appropriate saving and investment
tools

Cohort effects
One may use these imperfections to specify the reasons why the data on Russian
households do not match up with the Life Cycle Hypothesis/Permanent Income Hypothesis
model.
1.1. Russians consider their current incomes far too low for saving. They would rather
borrow than save, but in the absence of opportunities to borrow, they live within their
means.
The level of incomes in Russia is too low to allow for the possibility to save. People live
in the hope of forthcoming economic well-being. That is why every time incomes rise, people
expect further growth of incomes, and instead of saving, they increase their consumption.
Liquidity constraints make borrowing impossible for them.
1.2. Russians smooth their consumption by using non-financial forms of savings.
In the absence of possibilities to borrow on the financial markets and to find the
appropriate financial instruments for savings, households tend to use non-financial forms of
savings to provide the appropriate level of consumption during the periods of negative income
shocks. Life Cycle Hypothesis is valid, but one needs to take into account the non-financial
forms of savings which substitute money savings in the presence of financial liquidity constrains
or the lack of trust in financial institutions and a shortage of appropriate saving and investment
tools.
1.3. Russians smooth their consumption over their life cycles, but due to the huge cohort
effect, one cannot find this through savings and incomes age profiles based on crosssection studies.
Saving-age profiles, which are based on cross-sections, are not appropriate because
cohorts differ in their incomes and propensities. If individuals born in different years are
different in their resources or preferences, the hump-shaped saving-age relationship will not be
observed in a cross section.
The second group of hypotheses is based on the idea that Permanent Income
Hypothesis/Life Cycle Hypothesis does not work in Russia in the same way it works in the
developed markets, not because of the ‘backwardness’ of the Russian economy and the existence
of market imperfections but, on the contrary, it reflects the general tendencies in saving
behaviour all over the world in the amplified form. In the presence of uncertainty, which in the
modern world refers not to the life trajectories of individuals only but also includes systemic
risks, it may become less reasonable to save money using external (financial and non-financial)
instruments of smoothing consumption, such as bank deposits or securities which are subject to
damage. A more secure strategy is to invest in developing personal abilities in order to earn
money under difficult economic circumstances. For example, in 1991 when the Russian
economy entered a period of systemic crisis, it turned out that skills which people had developed
through their consumption patterns did help them find opportunities to maintain their
consumption in spite of the devaluation of their savings, education and professional skills. Many
of those who experienced huge wage arrears or became unemployed in the process of the
restructuring of the economy found new opportunities using their consumption skills.
I can specify two reasons why the data on Russian households do not match the Life
Cycle Hypothesis/Permanent Income Hypothesis model in as the following:
2.1. It is less reasonable to smooth consumption with the help of savings in the presence
of high instability of financial markets. Russians who are more flexible in their earnings
are able to smooth their consumption through their life cycles with the help of earnings,
not savings.
The widespread informal economy gives Russians the opportunity to earn more when
money is needed. For example, driving skills, mastery of cooking or artistic talent may increase
one’s chances to find a job on the market when unemployed, especially when one’s highly
specialized professional skills are depreciated. Further, from the life-cycle perspective, retirees
may compensate for loss of income by continuing to work after retirement or by sharing incomes
within the household.
2.2. It is possible to smooth consumption of substitution market goods by non-market
(home-made) goods.
In the presence of uncertainty on the markets, households may prefer to provide for their
basic consumption with the help of domestically produced goods which are difficult to estimate
in terms of money.
Finally, one might suspect that Permanent Income Hypothesis/Life Cycle Hypothesis
does not work in Russia at all – there is no smoothing of consumption in any form.
By some unknown reason, it is impossible for a household to estimate both the permanent
level of incomes and the permanent level of consumption. That is why instead of smoothing
consumption, they track their consumption close to incomes, economising when current incomes
are low and expending on consumption when they are high. As a result Russians have become
flexible in their consumption through their life cycles.
Conclusions
In the third chapter I dealt with the explicit elaboration of a possible sociological contribution
to economic theory of consumption and savings and vice versa. I introduce the notion of a
‘saving strategies’ in order to develop the idea that universal strategy of consumption smoothing
in different social contexts may take different forms. Using the economic idea that savings
cannot be explained by current income alone, the concepts of cultural and social capital, different
types of economies, and trust are discussed as possible sociological contribution to the
development of the idea of consumption smoothing. Social and cultural capital may accompany
or even substitute for financial and human capital in the process of consumption smoothing in
the situations of uncertainty. Social networking or ‘investing’ into the embodied skills to earn
money in difficult economic circumstances may begin to be considered more attractive than
saving money with the help of financial instruments like bank deposits or securities which are at
risk to decrease in value.