'Happiness is ... " begins Professor Richard Layard. He pauses. I sit forward in my seat expectantly. Which definition will the government's happiness tsar pick? "A warm gun" (Lennon)?; "The greatest good" (Bentham)?; "The meaning and the purpose of life" (Aristotle)?; "The motive of every action of every man, even of those who hang themselves" (Pascal)?; "The greatest gift that I possess" (Dodd)?

This isn't a small matter. How he defines happiness is one of the most fascinating questions in British public life today, because Layard is quietly effecting a revolution in this miserable, materialistic, overworked country. A Labour peer since 2000, he has been able to influence first Blair's administration and then Brown's into making his happiness agenda government policy. His calls for cognitive behavioural therapy (CBT), for school lessons in emotional intelligence, and other allegedly happiness-causing reforms have been greeted warmly by education secretary Ed Balls, health secretary Alan Johnson, the health guideline-setting National Institute for Clinical Excellence and by local authorities up and down the country. Layard is founder director of the Centre for Economic Performance at the London School of Economics, and runs its Well-Being programme. He speaks cheerfully of how the word "well-being" now figures in job titles at government departments, how the new government policy includes commitments to well-being, how the Office for National Statistics is developing the measurement of well-being, how Ed Balls's Social and Emotional Aspects of Learning programme is devoted to making secondary school children focused on well-being. For Layard, you see, well-being is just another way of saying happiness.

But what is this thing called happiness? After a pause, he finishes his sentence thus: "Happiness is inversely related to income at higher levels of income because of the declining marginal utility of getting richer," says Layard. "Let me show you." He draws a graph: on the X axis is income per head, on the Y axis is average happiness. A curve ascends boldly and then tails off ignominiously. At the bottom of the curve, you will find countries such as Zimbabwe or Russia, where increases in national income per head will increase levels of happiness. "Think of economic growth in India - it has been associated with rises in average happiness." On the ignominious bit you will find a cluster of western countries, including our own, where such rises in income per head don't cheer us up one bit.

When do income rises stop making us happier? Around $20,000, according to Layard. Or, in sterling, £10,128.89. After that there is an inverse relationship between more money and happiness. Quite a lot of you might be thinking you should apply for massive salary cuts, but that's to misunderstand Layard: he's talking about average national incomes rather than individual pay rises.

"When I realised that pursuing national income per head wasn't necessarily a panacea, it was like a bolt of lightning. It made me question what economics is about. It made me ask, what is progress, if not rising GDP?" So, then, what is progress? "It's the reduction of misery and the increase in enjoyment of life. If rises in income aren't doing it, then you have to find out what does produce progress. That is where happiness comes in. Aristotle said that happiness was the only thing that man wanted for which he could give no reason. Anything else - income, sex or whatever - was always for something else, be it to buy things or for the future of the species. But happiness was, for Aristotle, a self-evident goal. And he's right: men and women want to be happy."

It is Layard's contention that, during the past 50 years, consumer society has become dominant and yet happiness has declined. We are richer, healthier, have better homes, cars, food and holidays than we did half a century ago. Unemployment and inflation are low, and yet so are levels of reported happiness. This is due, he says, to a series of things - the break-up of the family, fractured communities, a loss of trust. "The same thing has happened in America, but it hasn't happened in the same way on the continent. I think this shows we are suffering from the extreme individualism that we have reported from America. We are unhappier as a result."

Layard talks in simple ways about these problems. "People would be happier if there were nice people when they went outside. But there is little confidence that there are nice people out there. Here and in the US levels of trust have fallen from 60% to 30% in the past 50 years. We are consumed with status, with envy." This makes the world a much more discombobulating one than economists traditionally thought: individual preferences are not constant, but shift in rhythm to cultural trends and peer pressure. It's a world in which one's accumulated possessions depreciate in value. Like Jacob Marley's chains, they drag us down rather than make us happy.

Layard had a problem, though. Happiness was not regarded as measurable. "I showed in 1980 that surveys showed happiness wasn't increasing, even though income per head was. I stopped thinking about the issue then, because I couldn't see how social policy could change that depressing fact; I had nothing to contribute because happiness was not yet objectively measurable."

Then, in the late 1990s, something happened that revolutionised Layard's career. Happiness became a new science. Or at least Layard, despite wails of derision from sceptics, says it did. Psychological researchers found a close correlation between reported happiness and activity in the cerebral cortex. As a result, Layard insisted, lots of the scepticism about reported happiness was misplaced."I have been so struck with the sophistication of the science in this area," he says. "It's really impressive." It gave Layard hope that he could both define happiness objectively, measure it accurately and then set about creating more of it.