Happiness is more important than GDP. This will not be a surprising statement for many, but what is surprising is that the statement comes from the former head of the civil service, permanent secretary to the Treasury and UK member of the IMF, Lord Gus O'Donnell. The statement coincided with the launch of the Wellbeing and Policy Report, commissioned by the Legatum Institute.

The idea of putting happiness at the heart of our economy is not new, but is not the focus of mainstream policy or culture in western economies. We have long been led to believe that GDP growth is ultimately the measure of a country's progress, creating jobs, investment and production of goods and services. However, our focus on spending our way to happiness is not borne out either by people's experience or by the statistical evidence.

The Legatum Report calls for a new policy direction that puts wellbeing at the core of economy and society. It shows that people are much happier in strong communities where trust is high and that mental health is the single biggest factor explaining cross sectional variation in life satisfaction. The core message that money does not buy happiness is borne out by many other studies. For example, a YouGov poll recently commissioned by Action for Happiness revealed that the majority of British people (87%) would choose happiness for their society rather than money (chosen by only 8%).

According to the same poll, when asked to choose the three most important factors for personal happiness, "relationships with my partner/family" came out top (80%), with "my health" in second place (71%) and "money" third (42%). "My possessions" polled a mere 4% of votes.

This is not a purely a British phenomena. Richard Wilkinson and Kate Pickett in their highly acclaimed book, The Spirit Level found that behind the economic growth statistics lies a more important trend. We now know that "economic growth and increases in average incomes have ceased to contribute much to wellbeing in rich countries". What is far more important in indicating level of happiness is the level of income inequality. Across countries and over time, they revealed a consistent finding that reducing inequality is the best way of improving the real quality of life in developed economies.

This shift in focus from material growth to equality and wellbeing goes to the heart of the concept of Gross National Happiness (GNH). GNH is more than a concept, it is a living experiment in an alternative development path pursued by Bhutan. Dr Tho Ha Vinh, programme director of the Centre of Gross National Happiness in Bhutan was invited to share the country's experience in GNH with participants at a recent course in the economics of happiness at Schumacher College in South Devon.

The definition of GNH from the first elected prime minster of Bhutan is clearly different from our popular understanding of "happiness", in our popular culture linked to feeling good, leisure and pleasure.

"We have now clearly distinguished the 'happiness'… in GNH from the fleeting, pleasurable, 'feel good' moods so often associated with that term. We know that true abiding happiness cannot exist while others suffer, and comes only from serving others, living in harmony with nature, and realising our innate wisdom and the true and brilliant nature of our own minds."

So, what is the Gross National Happiness Framework initially developed in Bhutan that is now having influence all over the globe? The Framework is based on the four pillars of preservation of the environment, preservation and promotion of culture, sustainable and equitable socio-economic development and good governance. The pillars are further refined into nine domains and a weighted index of 33 indicators.

This may seem familiar territory to many, with the growth of alternative socio-economic indicators. But what is different, is that in Bhutan the framework is also the country's development strategy and is actively used as a policy screening tool and as a guide to allocating government resources. For example, the government recently based its decision not to join the World Trade Organisation using the screening tool.

It is also about a shift of consciousness. When the king of Bhutan announced that growth in Gross National Happiness is more important than growth in Gross National Product, this represented a shift in consciousness beyond seeking satisfaction in material goods and services, towards finding happiness and wellbeing in our inner world. This wasn't taken seriously in the 70s, but now there is an explosion of interest in alternative development models – and GNH in Bhutan in particular. For example, the UN General Assembly's resolution 65/309 was initiated by Bhutan, entitled Happiness: Towards a Holistic Approach to Development, July 2011.

Let's hope that this renewed focus on the primary importance of psychological health and social wellbeing will shift the trajectory of our economies towards greater prosperity and wealth beyond material growth.

Julie Richardson is a senior lecturer in economics for transition, a postgraduate programme run in partnership between Schumacher College and Plymouth University

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