What is the ultimate goal of public policy? Asked such a blunt question, most politicians would find themselves blustering with some kind of answer about “promoting freedom and prosperity, and upholding the rule of law”.

Politicians often talk as though life were an economic assault course. But wealth, freedom and even law are surely means rather than ultimate ends. Economic values now permeate political discourse so deeply that it often seems as though the fundamental goal of nations is to maximise wealth or prevail in a competitive struggle with others. Yet amassing ever more material goods surely can’t be the point of it all.

Promoting freedom under the law is a more promising goal. But suppose freedom made us miserable - would we then rate it as so important?

Richard Layard, a leading British economist and Labour peer, argues persuasive- ly in his new book that the answer is “no”. The most plausible ultimate goal, he suggests, is the promotion of human happiness, where each individual’s happiness is regarded, at least in principle, as equally important. We value freedom because it is a precondition for happiness, rather than vice versa. Nothing is more basic than being happy or feeling good, because we do not need to justify this in terms of anything else.

In Happiness: Lessons from a New Science, Layard is not saying that we should cease to value truth, beauty or goodness. He argues not for the promotion of fleeting sensations of pleasure but, like Aristotle, for happiness sustained over a lifetime. If the talented individual is to be happy, he must set himself worthwhile goals. Making happiness the goal of policy would not be dumbing down, but an acknowledgement of the basic fact that we all want to be happy.

Layard attempts to integrate the latest research in economics and psychology, drawing particularly on the work of Daniel Kahneman, the Princeton-based psychologist who won a 2002 Nobel Prize for economics. Although Layard discusses some abstruse ideas, the book is accessible, lucid and almost jargon-free (perhaps because the author started out as a historian rather than an economist).

That Layard is calling for a radical revision of public policy is revealing in itself. A leading economist is saying that the economics profession has no clothes; economists have been giving the wrong advice for decades because they have focused on wealth creation rather than happiness. And as a messenger Layard has credibility. He has long advised the Labour party on economics and is the architect of policies - such as its “welfare to work” strategy - that some regard as hard-nosed.

Yet when I visited him at his office at the London School of Economics, he insisted on the continuity of his thought. His cure for unemployment is an example of the happiness principle. It is not enough to give the jobless the choice of benefits or work, because they will in fact be happier if employed, even if they don’t realise it. They sometimes need a gentle shove - for their own good.

Yet can he really expect seasoned politicians in the 21st century to focus on happiness? This was the signature policy of Jeremy Bentham, the Enlightenment philosopher and founder of utilitarianism, yet such views have been out of fashion among philosophers and economists for decades.

Layard believes happiness can be rehabilitated as a policy goal, however. “I thought it should be in the manifesto,” he says, referring to Labour’s strategy for the next general election, expected in May.

In the 19th century, he explains, economics was known as the “science of happiness”. Economists urged governments to promote more of it. They argued for progressive income tax on the grounds that a dollar gives more happiness to a poor person than a rich person. But during the 1930s, psychologists derailed Benthamite economics. Behaviourists such as Harvard’s BF Skinner argued that it was unscientific to try to measure obscure “mental” phenomena such as thoughts and feelings. Since physical responses are the only reliable data, the social scientist must base his theories on how people behave in response to stimuli.

For economists it was the equivalent of the Copernican revolution. If people’s feelings could not be measured or compared, the goal of increasing aggregate happiness made no sense. So they followed the behaviourists and focused on what people do: instead of maximising happiness, the goal became to maximise people’s opportunity to satisfy their tastes or preferences by buying or selling merchandise. In effect, the emphasis shifted from happiness to freedom - to removing the barriers that prevent people choosing for themselves.

Here, then, is the theoretical grounding of the broadly free-market policies that have since swept the world. And yet, cautions Layard, what if the behaviourists got it wrong? What if people’s feelings - and hence happiness - are measurable after all? Laissez faire would no longer rule, because there would now be an objective test of the success of public policy: does it, or does it not, increase people’s happiness?

Economics could become scientific rather than ideological: instead of merely asserting the superiority of free markets, economists could see when and where they actually make people happier. Happiness, after all, is not the same thing as the free exercise of choice, since people often regret their decisions.

Advances in neuroscience during the 1990s, Layard argues, have transformed the intellectual landscape in ways that few people yet understand. “What clinched my decision to write this book is the evidence that what people say about their feelings corresponds to measurable electrical activity in their brains.” When someone looks at a picture of something pleasant, an MRI scanner can pick up the electrical activity that produces the feelings that they describe as good.

But how do we know that what we feel when we say we are happy is the same

as what others feel when they say they are happy, and the scanner picks up the same activity?

Layard’s answer is that we are evolved animals with similarly wired brains. The logical assumption is that similar brains stimulated in similar ways produce similar feelings in their owners. We are also social animals. “We couldn’t get on with other people if we didn’t know how they feel,” he says, dismissing a couple of centuries of philosophical argument about the existence of other minds.

But if we accept that happiness should be the goal, public policy appears to have failed in recent decades. Gross domestic product has streaked ahead nearly everywhere: in the US, real living standards in material terms have more than doubled in the past 50 years. But the proportion of people who describe themselves as happy has not risen. The picture is similar in the UK, where surveys that invite people to assess their own feelings suggest that happiness has been static for 30 years, in spite of huge gains in material wealth.

Might the survey data be unreliable? Possibly. We cannot confirm historical data with contemporary brain-imaging technology. Yet the central finding of happiness research appears pretty robust. Once a nation has passed a threshold level of income, the correlation between aggregate wealth and people’s happiness is weak.

Wealth has increased much faster than happiness partly because governments have striven to increase people’s brute purchasing power rather than taking a broader view of what makes them feel good. The policy revolution that Layard is calling for might be described as emphasising mind over matter: the guide would increasingly become modern psychology rather than old-fashioned materialistic economics.

He says the first crucial step is to bring about a change in the aims of public policy. Every government department, for instance, should assess its progress according to the happiness criterion: is it, or is it not, contributing to an increase in overall well-being? “I would love the Treasury to set up a small expert committee to see how government policy and the funding of research in social science could be modified to take into account the well-being objective,” he says.

It is not possible to predict the consequences of such a move, he argues, because research on happiness is still in its infancy. “We are not fully there yet because we need more evidence on how different policies actually affect people’s levels of happiness.”

But he gives numerous examples of the kind of difference that a shift in emphasis from wealth-creation to happiness would make. Policy would need to become more holistic or “joined up”, because government would need to worry more about the interconnections between policies. It is wrong, for instance, to assume that economic policies have only economic outcomes. The promotion of job mobility is not always advisable, he warns, when you take account of the adverse effects on family relationships and the cohesion of communities.

The management of the public sector needs to be rethought completely, says Layard. He still favours targets, but worries that performance-related pay may do more harm than good, because of its corrosive effects on trust and other forms of motivation - such as professional ethos and the desire to do a job well for its own sake. The problem, again, is that the focus has been on efficiency, rather than on what makes people feel good.

And if as a nation we are ever to achieve a sensible work-life balance, public policy must acknowledge people’s worries about social status and their position relative to others. People in the bottom half of the income distribution are just as unhappy as decades ago: they may be wealthier in absolute terms, but others are even more wealthy.

It is not just a matter of base envy. Concern about status is bred into us by natural selection: high-status monkeys are happier and healthier than low-status ones. Just piling up material goods will never solve the problem of status differences. In broad terms, the goal of happiness thus implies we need to create a more egalitarian society.

Layard is also demanding a revolution in healthcare. The biggest single source of unhappiness, he argues, is mental ill health - depression, anxiety, phobias and so forth. One in six British adults suffers from some form of mental illness, and yet mental illness is grossly underfunded relative to other forms of medicine. It is as big a problem today as unemployment was in the early 1980s, yet largely ignored by policymakers.

But it is in education - especially moral education - that he believes the happiness criterion could potentially exert the most influence. While his book may appear in the economics or sociology sections of bookshops, it also makes a fine contribution to the literature of self-help, which is concerned as much with inner as outer sources of happiness. Like Bentham, Layard thinks the promotion of happiness should be a guide for personal behaviour as well as public policy. He also thinks that helping others is a way to help oneself. But children, he argues, need to be taught this.

”Science has solved the problem of physical scarcity,” he says, “at least in developed countries. But we haven’t solved the inner problem of regulating our desires and emotions. That will become more important. I do think there needs to be a revolution in education - from focusing so heavily on what you need to get ahead in life, towards values and character-building.”

HAPPINESS: Lessons from a New Science
by Richard Layard
Allen Lane £17.99 256 pages