Imagine a world in which Britain had not fetishised the deregulation of finance and not carelessly privatised its utilities as PLCs with “light touch” regulation. Then imagine it had not chosen to cut its post-financial crisis deficit solely by public spending cuts of unparalleled severity. The privations of so many would not have been so cruel and this fair-minded country of ours would not be descending into an unending civil war.

For in these circumstances, the referendum might have been emphatically won, according to recent research. The University of Warwick’s Thiemo Fetzer looked at the geography of public spending cuts between 2010 and 2016, which fell disproportionately hard on places already suffering acute social distress, with the growth of Ukip and Leave votes. Unsurprisingly, he found a close, symbiotic relationship. Thus each person in Blackpool, already reeling from low pay and high levels of personal depression, suffered on average a £914 drop in social and welfare spending over those years compared with under £200 for those in the richer parts of Remain-voting London. Blackpool voted 67.5% to Leave as a protest against a palpably unfair status quo. Fetzer concluded that without austerity the Remain vote would have been 10% higher. Rarely has a country found itself so pulled out of true, the heart of the political and constitutional crisis now enveloping us.

For austerity did not spring out of nowhere. Spending did not have to be cut so quickly and so severely – by 2020, by nearly 25% per head. There did not have to be a prohibition on raising taxes so cuts took all the strain, cuts focused on the weakest parts of the country. These were all choices that had their origins in rightwing thinking, which believes that public action is self-defeating, that business in free markets can only deliver the best results and that we are all individuals whose sole responsibility is to ourselves. Taxes confiscate what is properly ours; welfare spending inhibits self-reliance; regulation curtails free choices.

Thus financial deregulation and the banking crisis. The growth of high-risk bank balance sheets could never have been indulged without the Thatcherite belief that business in free markets never makes mistakes and any attempt to stop it would be misplaced. The result was an economic debacle whose impact lives to this day. Recently, the IMF’s World Economic Outlook reported that 85% of the countries that experienced the banking crisis are still showing the scars 10 years later, not just in output being lower than it would otherwise have been, but in social phenomena such as declining birth rates. There has been a shattering in our collective confidence – even confidence by men and women that they can afford to, or even should, have children. Bad economics has had a disastrous effect on our lives.

The more intensely held those beliefs, the worse the impact and Britain was the cheerleader-in-chief with the largest and least regulated financial sector. Gordon Brown had the wit to rethink fast and his actions in 2008/9 mitigated the worst, but the intellectual and political problem was that he and New Labour had been fully paid-up members of the deregulatory, pro-free market consensus before the crisis. He could not mount a corrective assault on the whole intellectual edifice because he had helped sustain it. Osborne and Cameron were thus able to keep the body of warped thinking alive. Worse, they fanned it, blaming public spending rather than the operation of markets for the crisis. The result was that a necessary policy to reduce the deficit in a managed way became translated into a demonic austerity.

For New Labour had not even challenged the terms on which the utilities had been privatised. Last week, Greenwich University’s public services international research unit reported that over the 29 years of water privatisation, water companies’ cash flow had consistently exceeded capital spending so that there had been no need for any borrowing. It is certainly true that if water had remained nationalised, investment would have been even lower, constrained by other claims on the public purse. But equally, what did not need to happen was for them to be privatised as companies compelled to deliver the same financial returns to shareholders as high-risk enterprises. As a result, they have borrowed cumulatively £51bn, but only to pay high and rising dividends, abetted by the regulator Ofwat. Water bills could have been between £50 and £100 lower a year.

No thought had been given to alternative models of privatisation – as a mutual, a co-operative or a public benefit company. There had been no focus on their shareholding structures, so the privatised water companies might create long-term shareholders of whom the state might be one. They had just been turned over to the wild west of the London stock market and the transactional asset management industry. It was an act of careless vandalism.

One of the paradoxes of the moment is that the rightwing coup of Brexit is creating a countervailing response. So John McDonnell wins a hearing for policies considered anathema only a few years ago. Intriguingly, Mrs May wrote in the Observer that she was committing to regulating markets and to easing austerity.

In the water industry, Ofwat is getting tougher and some of the companies are showing a new commitment to their customers. The rightwing hardliners threatening to vote down Mrs May’s Brexit deal because it might constrain the Thatcherite world they want to build believe they are tribunes of the future. Rather, they are a lost tribe stranded. There is no majority in the country for what they want to do and if they ever gain control of the Tory party they will finally break it in the effort. Whatever happens on 29 March next year – hard, soft or no Brexit – afterwards, Britain will begin a long march away from the economic madness that has led to today’s profound ills.

• Will Hutton is an Observer columnist