Socialism lives in Britain, but only for the rich: the rules of capitalism are for the rest of us. The ideology of the modern establishment, of course, abhors the state. The state is framed as an obstacle to innovation, a destroyer of initiative, a block that needs to be chipped away to allow free enterprise to flourish. "I think that smaller-scale governments, more freedom for business to exist and to operate – that is the right kind of direction for me," says Simon Walker, the head of the Institute of Directors. For him, the state should be stripped to a "residual government functioning of maintaining law and order, enforcing contracts". Mainstream politicians don't generally talk in such stark terms, but when the deputy prime minister Nick Clegg demands "a liberal alternative to the discredited politics of big government", the echo is evident.

And yet, when the financial system went into meltdown in 2008, it was not expected to stand on its own two feet, or to pull itself up by its bootstraps. Instead, it was saved by the state, becoming Britain's most lavished benefit claimant. More than £1tn of public money was poured into the banks following the financial collapse. The emergency package came with few government-imposed conditions and with little calling to account. "The urge to punish all bankers has gone far enough," declared a piece in the Financial Times just six months after the crisis began. But if there was ever such an "urge" on the part of government, it was never acted on. In 2012, 2,714 British bankers were paid more than €1m – 12 times as many as any other EU country. When the EU unveiled proposals in 2012 to limit bonuses to either one or two years' salary with the say-so of shareholders, there was fury in the City. Luckily, their friends in high office were there to rescue their bonuses: at the British taxpayers' expense, the Treasury took to the European Court to challenge the proposals. The entire British government demonstrated, not for the first time, that it was one giant lobbying operation for the City of London. Between 2011 and 2013, bank lending fell in more than 80% of Britain's 120 postcode areas, helping to stifle economic recovery. Banks may have been enjoyed state aid on an unprecedented scale, but their bad behaviour just got worse – and yet they suffered no retribution.

Contrast this with the fate of the unemployed, including those thrown out of work as a result of the actions of bailed-out bankers. In the austerity programme that followed the financial crisis, state support for those at the bottom of society has been eroded. The support that remains is given withstringent conditions attached. "Benefit sanctions" are temporary suspensions of benefits, often for the most spurious or arbitrary reasons. According to the government's figures, 860,000 benefit claimants were sanctioned between June 2012 and June 2013, a jump of 360,000 from a year earlier. According to the Trussell Trust, the biggest single provider of food banks, more than half of recipients were dependent on handouts owing to cuts or sanctions to their benefits.

Glyn, a former gas fitter from Manchester, was sanctioned three weeks before Christmas 2013, and received no money. He had missed a signing-on day because he was completing a job search at Seetec, one of the government's corporate welfare-to-work clients. Then there's Sandra, a disabled Glaswegian who lives with her daughter. She was sent a form asking to declare whether she lived with someone; assuming it meant a partner, she said no, and was called in to a "compliance interview". Because her daughter was not in full-time education, Sandra was stripped of her entitlement to her £50 per week severe-disability allowance. While the financial elite could depend on the state to swoop to their rescue, those who suffered because of their greed felt the chill winds of laissez-faire. Socialism for the rich: sink-or-swim capitalism – and food banks – for the poor.

Socialism for the rich manifests itself in a variety of ways. In 2004, corporations were posting record profits, and yet their workers' wages had begun to stagnate or – in the case of those in the bottom third of the income scale – had started to decline. To ensure that these underpaid workers have an adequate standard of living, they receive tax credits "topping up" their take-home pay – subsidised, of course, by the taxpayer. In 2009–10, for example, the government spent £27.3bn on such tax credits. Between 2003–4 and 2010–11, a whopping £176.64bn was spent on them. Now, millions of working people who would otherwise be languishing in abject poverty depend on these tax credits. But that does not detract from the fact that tax credits are, in effect, a subsidy to bosses for low pay. Employers hire workers without paying them a sum of money that allows them to live adequately, leaving the state to provide for their underpaid workforce.

The same principle applies to the £24bn spent on housing benefit. In 2002, 100,000 private renters in London were forced to claim housing benefit in order to pay the rent; by the end of the New Labour era, rising rents had increased the number to 250,000. On the one hand, this was the symptom of the failure of successive governments to provide affordable council housing. With tenants instead driven into the more expensive private rented sector, housing benefit acts as a subsidy for the higher rents of private landlords. But housing benefit is another subsidy for low wages, too. According to a study by the Building and Social Housing Foundation in 2012, more than nine in every 10 new housing-benefit claims in the first two years of the coalition government went not to the unemployed but to working households. Many of these claimants are workers whose pay is so low that they simply cannot afford the often extortionate rents being charged by private landlords. As well as individual private landlords, companies providing private housing were being subsidised by housing benefit, in some cases receiving more than a million pounds of taxpayers' money each year, such as Grainger Residential Management and Caridon Property.

One such private landlord is Conservative MP Richard Benyon, one of Britain's wealthiest parliamentarians whose family is worth around £110m. Despite having condemned spending on social security for "rising inexorably and unaffordably", and having applauded the government for "reforming Labour's 'something for nothing' welfare culture", Benyon benefits from £120,000 a year through housing benefit collected from his tenants. Another vigorous supporter of cuts to the welfare state was Tory MP Richard Drax, whose estate received a substantial £13,830 housing benefit in 2013. They are both wealthy benefit claimants who advocate slashing state support for the poor.

Much of Britain's public sector has now become a funding stream for profiteering companies. According to the National Audit Office (NAO), around half of the £187bn spent by the public sector on goods and services now goes on private contractors. One such company was Atos, first hired in 2005 by the then Labour government to carry out work-capability assessments. Its contract was renewed by the coalition in November 2010, now with far greater responsibilities as the government launched a sweeping programme of so-called "welfare reform". This five-year contract was worth £500m, or £100m of public money every year. In 2012 the NAO condemned the government contract with Atos for failing to offer value for money. Atos had not "routinely met all the service standards specified in the contract", the report declared; its record on meeting targets was "poor"; the government had failed to seek "adequate financial redress for underperformance"; and the "management of the contract lacked sufficient rigour".

Disabled people who needed support were having their support stripped away by Atos. In one three-month period in 2012, 42% of appeals against Atos judgments were successful; but it is a process that is expensive for the taxpayer and often traumatic for the claimant. In the harsh benefit-bashing climate of austerity Britain, disability charities reported that "scrounger" rhetoric had provoked a surge in abuse towards disabled people on the streets. But the behaviour of state-funded private contractors such as Atos must surely raise the question of who the real scroungers are. It was not until April 2014 that Atos was forced to abandon the contract because of the growing backlash, but not until they had pocketed large sums of public money.

This hiving off of core state functions – in this case, assessing support for some of the most vulnerable people in society – to private companies who exchange public money for a poor service is a striking feature of the modern establishment. Another such business is A4e, a welfare-to-work company dogged by controversy over poor performance. As one former A4e contractor suggested to me, A4e was running a "farming exercise", cherry-picking easy cases and leaving the rest in the "field". Its former chairman Emma Harrison paid herself £8.6m in dividends, all courtesy of the taxpayer. In February, four former A4e employees admitted committing acts of fraud and forgery after charging the state for working for clients that did not even exist.

In 2012, £4bn of taxpayers' money was shovelled into the accounts of the biggest private contractors: Serco, G4S, Atos and Capita. It led to a damning assessment from the NAO, which Margaret Hodge, chair of the Public Accounts Committee, summed up: this outsourcing, she concluded, had created "quasi-monopolies", the "inhibiting of whistleblowers", the trapping of taxpayers into lengthy contracts, and a "number of contracts that are not subject to proper competition". G4S had been contracted to provide security personnel for the 2012 Olympics; when it failed to provide them, the state – predictably – had to step in, mobilising 3,500 soldiers and leading even the then minister of defence, Philip Hammond, publicly to question his previously unwavering commitment to private sector provision of state functions. At the end of 2013, the Serious Fraud Office launched an investigation into Serco and G4S, after they allegedly overcharged the taxpayer tens of millions of pounds for the electronic tagging of clients, charging for clients who had left the country or were even dead. Many of these private contractors, such as Atos and G4S, pay little or no corporation tax, even as they benefit from state munificence.

'Privatisation of rail was a form of socialism for the rich.' Photograph: Velar Grant/Demotix/Corbis

Privatisation of rail was a form of socialism for the rich that became particularly notorious. According to a report by the Centre for Research on Socio-Cultural Change, state spending on the privatised railways was six times higher than it was in the dying days of British Rail. And yet under the privatised system, rolling stock was replaced less frequently, there was not enough carriage space to accommodate rising numbers of rail passengers, and ticket prices were the highest in Europe. As the report put it, technological innovation and improvement were powered or underwritten by the state. The taxpayer shouldered the risk, while profit was privatised: or "heads they win and tails we lose".

Big business is dependent on the state in a multitude of other ways. An expensive law-and-order system defends its property. The privatisation of Royal Mail ensured that the state kept the pension liabilities – nationalising the debt, privatising the profit. The business elite benefits from around £10bn spent on research and development by the British state each year: and innovations from the internet to the technology behind the iPhone originate from public sector research, as Mariana Mazzucato uncovered in The Entrepreneurial State. Big business relies on extensive spending on infrastructure: in 2012, the Confederation of British Industry suggested savings from cuts to benefits – raids on the pockets of the working and non-working poor – could be used to invest in the road network. And the state educates the workforce of big business at vast expense.

'The privatisation of Royal Mail ensured that the state kept the pension liabilities.' Photograph: Matthew Lloyd/Getty Images

With big business benefiting from so much state largesse, you might expect gratitude in the form of the glad payment of taxes. After all, this socialism for the rich is not cheap. A common figure bandied around by defenders of Britain's wealthy elite is that the top 1% of earners pay a third of all income tax, conveniently ignoring the fact that only a quarter of government revenue comes from income tax, with much of the rest coming from national insurance and indirect taxes paid by the population as a whole. But tax avoidance is rampant among much of the corporate and wealthy elite that benefits so much from state handouts. While the law cracks down on the misdemeanours of the poor, it allows, even facilitates, the far more destructive behaviour of the rich. Compare the billions lost through tax avoidance to the £1.2bn lost through benefit fraud, an issue that remains the news fodder of choice for the rightwing press.

The manner in which this happens shows who the state exists to serve. The Big Four accountancy firms – EY, Deloitte, KPMG and PricewaterhouseCoopers (PwC) – have been slammed for their role in tax avoidance. But their response is instructive. "We don't ever condone tax avoidance or support tax avoidance," pledges EY's Steve Varley. "Fundamentally, parliament has to legislate what parliament wants to happen … And people like us can follow the legislation and provide advice to our clients."

But what Varley conveniently fails to mention is that firms such as EY help design the law in the first place, and then go off and help advise their clients on how to get around it. "We have seen what look like cases of poacher, turned gamekeeper, turned poacher again," declared the Public Accounts Committee in April 2013, "whereby individuals who advise government go back to their firms and advise their clients on how they can use those laws to reduce the amount of tax they pay." This is an astonishing finding. Senior MPs have concluded that accountants were not simply offering governments their expertise: they were advising governments on tax law, and then telling their clients how to get around the laws they had themselves helped to draw up.

When it comes to rhetoric, the modern establishment passionately rejects statism. The advocates of state interventionism are dismissed as dinosaurs who should hop in a time machine and return to the discredited 1970s. And yet state interventionism is rampant in modern Britain: but it exists to benefit the rich. No other phenomenon sums up more starkly how unjust modern Britain is. Social security for the poor is shredded, stripped away, made ever more conditional. But welfare for large corporations and wealthy individuals is doled out like never before. The question is not just whether such an establishment is unjust: the question is whether it is sustainable.

• Owen Jones's The Establishment: And How They Get Away With It is published by Allen Lane this week.