Economists have long considered themselves fortunate that micro-economic
theory needs only be based on relative utility, as it is widely believed that utility is not measurable in absolute terms. But this view is no longer valid. The measurement of happiness constitutes a good approximation to utility. It is shown that research on happiness provides new evidence on important issues of
economic theory and policy. In particular, it is shown how unemployment, income and inflation affect self-reported subjective well-being. The results are
partly in line with accepted economics but partly throw doubt on it. Institutions, such as the type of democracy and the extent of political decentralisation, also systematically affect individual happiness.