As mostly pointed out, it's all to do with view distance BUT it's also to do with the field of vision. It's argued that a viewing field of around 24-30 degrees is optimal. So in other words, if you are viewing the screen so that 2 imaginary lines are angling from the corner of your eyes to the edge of the display and that field is 30 degrees (or so), then you are viewing the image at the most comfortable position. This is why sitting at the middle of a cinema seems the best, so to speak.
Now, if the screen is a 720 display and you are at the optimal view distance, you will see the pixel elements (especially on an LCD screen (assuming a person has 20/20 vision). If it was a 1080 screen, you will just be at the right distance as to not see the pixel elements yet still enjoy the FULL benefit of the 30 degree viewing angle.
So, if you bought a 32in 720 TV and were sitting back not much more than about 2m's (probably less), and then compare that image to a 32in 1080 TV, you wont tell the difference.
Basic rule of thumb, the bigger the display, the more people that can benefit from a "comfortable" full HD experience at a comfortable viewing distance. 1080p 32in TV's are a waste assuming that the majority of people will be more than a little distance away whilst viewing.
But, 720p vs 1080p, assuming correct setup of viewing distance and 20/20 vision? 1080p is definitely superior.
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