Each edition of the American Psychiatric Association's Diagnostic and Statistical Manual of Mental Disorders (DSM) has a massive impact on psychiatric practice and medical education around the world. The book lists mental disorders and explains how to diagnose them. Seen as a gold standard, it dictates diagnostic practice in mainstream medicine.

Every media mention of DSM calls it the "bible" of mental health, and, like the latter, it generates passionate controversy. Proposals for the next edition, due in 2013, have sparked international protest, as DSM-5 looks as if it will lower the threshold of what counts as mental disorder. Critics have argued that new categories like "psychosis risk syndrome", "temper dysregulation disorder", and "binge eating" threaten to pathologise the human condition, turning clinically insignificant behaviour into illness.

People with no signs of distress may be encouraged or coerced to have therapy or take medication, with diagnoses such as "psychosis risk syndrome" being made even if a psychosis has not appeared. With the ramification of diagnoses, stigmatisation and discrimination would snowball. After DSM-5, no one will be normal again.

These critiques are both enlightening and obfuscating. The new DSM follows the logic of its predecessors: disorder is defined in terms of behaviour, so that visible aspects of our lives are used to define clinical categories. If you're nervous and shy, rather than seeing this as the symptom of an underlying clinical category to be discovered, it becomes a clinical category in itself: social phobia.

Gone is the idea of complex psychical causality or even of an interior life. For DSM, only two kinds of causes exist: biological and stress-related. The new diagnoses are made on surface symptoms that can be swiftly classified rather than invisible structures that can only be diagnosed after considerable time. As one American psychiatrist put it, using the ever-expanding diagnostic system of DSM was like trying to carve the Thanksgiving turkey according to its feathers rather than its bone structure.

This expansion cannot be denied. The first edition of DSM in 1952 was a mere 129 pages, with a few basic diagnostic categories. By the 1980s it had grown to over 900 pages, and the 180 categories of mental disorder present in 1984 would more than double over the next decade. What could explain this exponential increase in the number of mental disorders we supposedly suffer from?

DSM followed a market-led vision of the psyche in which symptoms were isolated entities that could be locally targeted. A symptom was not seen as a general problem in a person's existence which, if unravelled, might lead to the unravelling of the self, but as a local disturbance that could be managed and put right. It reflected not only today's atomisation of the self but also the belief that we can change parts of ourselves without affecting other parts.

Changes in drug legislation also played a part. Each new product had to define its active ingredients, the outcomes sought and the delivery period for attaining them. This meant a new kind of surface precision. Drugs would have to prove through expensive trials that they were more effective than placebo and did better than other drugs. It was the drug industry that created the new diagnostic categories. With each new category came a new medication.

Exacerbating this problem is the fact that in many parts of the US, a clinician will only receive reimbursement if they make a prescription, which means making a diagnosis. Like drugs themselves, clinical categories become objects in the marketplace, wielding economic power. The result is that the patient's underlying problems may well be neglected in favour of surface diagnoses that are both unscientific and misleading.

Curiously, the uproar over the DSM-5 proposals does bring a key clinical issue into focus. Critics complain that no one will be normal, as the threshold for disorder will be so low. But shouldn't this make us question the usefulness of talk of normality or, indeed, of "mental health"? Have these terms ever really helped anyone, beyond reinforcing the prejudices of "us" and "them"?

It is true that many people diagnosed with a so-called "mental illness" find the label helpful, allowing them to see their difficulties on a par with a physical illness, to be recognised and treated. But who are the "normal" people we would set them up against? Clinically, normality and psychosis are often the same thing. Someone may complain that everything is the neighbour's fault, not theirs, or that a plot has been hatched against them. Old psychiatry recognised this innocence of some psychotic subjects. Clinicians also know that it is in the most serious cases that a childhood is described as happy or uneventful.

Realising that no one is healthy and normal does not have to mean pathologising or medicating them. On the contrary, it can introduce a more humane approach to so-called "mental illness". Even Eugen Bleuler, who popularised the term "schizophrenia", argued that the most common form of this condition was latent. Once we accept that we can have disorders that don't activate – or to put it another way, that there is a difference between being mad and going mad – we might study what allows one person to function and another not to.

This is what old psychiatry once explored with detail and passion: the lifestyle choices, activities, roles or other solutions that people found to avoid breakdown. Studying these restitution mechanisms can help us to work with those who have not been so fortunate, and who find their lives shattered by the outbreak of psychosis.

The imperative to make people normal – rather than recognise the fault lines in all of us and strive to make them more bearable – is a constant pressure for a mental health force already overburdened by a focus on categorisation rather than on humane interactions and the uniqueness of an individual's story. Multiplying labels will not reduce the distress of those suffering most in our society: it can only serve to mask the lack in what we provide.