It is often assumed that Freud's most disturbing idea was that of sexuality, the idea that we are all perverts in our dreams. In fact, far more difficult for the professions of mental health in the 20th and 21st centuries is the concept of the unconscious, the suggestion that there are regions of the mind we can never fully control. Psychoanalysis starts from the premise that we are freighted with a form of knowledge we cannot bear. It takes time and a great deal of patience on the part of patient and analyst to navigate the quicksands of the soul.

Psychoanalysis is not an exact science. Nor, even though Freud never relinquished a partly scientific vocabulary, would it wish to be. It could not be further removed from the drug-based treatments for mental disorder which have turned the drugs industry into one of the most profitable in the UK, or from cognitive behavioural therapy (CBT), the government-sponsored therapy of choice – 6,000 CBT therapists to be trained over the next four years. In No Health without Mental Health, its February policy document, the Department of Health advocates "evidence-based" therapy which allows "session by session outcome monitoring" with service reports to be placed in the public domain (a bit like rankings for hospitals and schools). Success will be measured predominantly by employment rates. In his introduction, Andrew Lansley acknowledges that unemployment is a key factor in precipitating anxiety disorders and depression. With the jobless rate currently above 2.5 million and rising as a direct result of the most vicious cuts and fiscal restraint since the 1920s, it seems fair to say that the government, by its own account, is provoking the problem it is trying to cure.

Darian Leader is best known as elegant populariser of French psychoanalyst Jacques Lacan. He is also one of the most effective campaigning voices against these developments in the treatment of mental disorder. "Gone," he writes in this important new book on madness, "is the idea of a complex psychic causality or even of an interior life." An "ethical reversal" based on an illusion – the belief that internal life can be objectively measured – has usurped the role of sensitivity to human speech. Today, as people are increasingly seen as resources to be bought and sold on the market, the individual is being emptied of her or his unconscious mental life. A first CBT interview will grade levels of depression on the basis of a questionnaire. In a wonderful moment in Ali Smith's latest novel, There But For The, a character at a dinner party starts shouting at another guest about CBT. Six sessions will sort her out, only "she shouts it, like a mad person, and she shouts it over and over, she has said it about six times". Perfectly, Smith conveys that there is something mad about a form of therapy whose vocabulary – get a grip, get CBT – possesses such frantic conviction. For Leader, such conviction is one of the chief properties of paranoia. The sufferer knows what is wrong with the world and sees it as their goal to put it right. As well as reflecting the ugly market-led ethos of the times, going for results in the realm of mental disturbance could be seen as a form of collective insanity in itself.

Freud is above all associated with the analysis of neurosis, but as analyst Michael Eigen has long pointed out, psychosis is at the core of his vision – the superego is a sadistic tyrant, the infantile ego hallucinates its missing pleasures, the id suspends all laws of space and time. In fact, for psychoanalysis too much sanity is an affliction. It is central to Leader's argument that delusion and sanity cannot be neatly separated. One of his most disturbing concepts is that of "quiet madness", a form of madness that no one would have any reason to suspect. Before he went on his murderous rampage in Norway, Anders Behring Breivik – nasty Islamophobe as he was – was to all appearances a normal if not model citizen. For the common view of madness, his outbreak might, paradoxically, be something of a relief. We prefer our mad people to be violent, although, in fact, more people are killed by drunks than by the insane. Leader is presenting us with a challenge. That we recognise there is such a thing as madness – there is not the slightest gesture here to the view that no one can be classified as insane – but equally that madness is part of us each and every one.

More important, what looks like psychotic breakdown may instead be the result of a collapse in the carefully nurtured delusional system which has allowed the psychotic to live at relative peace both with the world and with her or himself. For Leader, after Freud, delusions are a form of creativity or restitution, a sign that the psychotic is trying to give shape to the chaos or invasiveness inside her or his head. In Henry and Patrick Cockburn's Henry's Demons, the celebrated father-and-son story of Henry's breakdown, the son insists – despite the harm he does to himself and throughout whatever drug-induced stupor inflicted upon him – on the beauty and integrity of his visions. He has simply entered a different world (it is important, too, that his inner voices become a regular feature only after he is first institutionalised).

The last thing, therefore, treatment should aim to do with severely disturbed patients is to crash in and rob them of their delusion or snuff out their minds with drugs. With paranoid patients, any such intervention is likely to be experienced as an assault. For Leader, the question the analyst should be asking is not how can I cure or help the psychotic, but what use can she or he make of me? One of the strongest impressions conveyed by this book is the immense respect Leader feels for his patients. Above all he wants to listen. In the words of one of his patients: "I have to make you into a hearer."

It is fundamental to a Lacanian understanding of psychosis that something in the world of meaning has been breached. Usually, language just about holds to its rules, fixes the world into some kind of symbolic network, and passes without too much trouble between the one who is speaking and the one who is addressed. In psychosis it fragments or takes on grotesque, inflated proportions, voices emanating from nowhere or from God. Even in these deformations, however, there is something we might recognise. After all, language first comes at the infant as voices against which there is no defence.

For Leader it is a matter of "basics" that meaning fails when the function of the father has not occupied its proper place. Without it, the child is bound to a maternal register, awash in a sea of plenty with no get-out clause, a world in which the child can believe it is everything for the mother (as well as the reverse). In such a world, there is no symbolic register because the father has not intervened to mark the place of the third, he has not imposed his "phallic law". Leader's commitment to this account, which comes from early Lacan, seems to be utterly untroubled by the feminist critique it has received – I found myself wincing as he blithely described the need to subject the mother to a "force" beyond her, to "carve" up the world of meaning, and "pin down" her desire. He is surely right that the verbal tapestry of psychotic language tells us that somewhere such breakdown is precipitated by our relationship to words. But he is too formulaic. As he himself observes, it is a characteristic of delusion to be unswervingly convinced by your own system of belief. There are other ways of thinking. "I've formed the opinion," writes performance artist and painter Bobby Baker, "that psychosis is a metaphor for extreme suffering."

I missed in this book the detailed case histories from his own practice, presumably omitted for reasons of discretion. Strangely, given his insistence on listening, the three main cases are Lacan's Aimée, Freud's Wolfman and Harold Shipman on the basis of court transcripts and reports. I also found myself wondering, given the intensity of commitment, the number of patients he refers to, what life is left for the analyst.

Leader deserves every support in his efforts to stop the insane, soul-destroying vocabularies on offer from filling the available mental space. Provided we remember that psychoanalysis can flourish only against the grain. It is always a "plea for a measure of abnormality" – the famous book title of analyst Joyce McDougall. As she put it, the day psychoanalysis no longer questions the established order of prejudices, "it will have ceased to fulfil its function".

The Jacqueline Rose Reader is published by Duke University Press.