To see what's really at stake in this week's autumn statement from George Osborne, do yourself a favour: duck out of the Westminster argy-bargy, hit the M1 and don't stop until you've reached Manchester. Then button-hole a physicist into showing you the wonder stuff discovered by two University colleagues just a few years ago.

It's called graphene and it's the thinnest material on earth – almost a million times slimmer than a strand of hair. I saw it lying on a wafer of silicon and it resembled nothing so much as breath on a windowpane.

Almost everything about graphene begs to be inscribed in legend. There's its discovery: a couple of Russian émigrés at Manchester engage in a "Friday night experiment" by peeling away at a pencil lead with sticky tape, until they isolate the one-atom-thick substance dreamt of by researchers for more than half a century.

The speed and scale of the reaction: from publishing results in 2004 to Nobel prizes six years later (poor old Einstein had to wait 16 years). The material's exceptional properties: tougher than diamond, stretchier than rubber, and better able to conduct electricity than anything else. Its myriad of possible uses: bendy touchscreens for mobiles, super-light batteries, artificial retinas, more effective drug delivery … and that's just for starters. Graphene could become as much a part of our daily lives as plastic.

Any one of these elements would have been remarkable; put them together and even sceptical fellow-physicists accept some kind of revolution has begun just off the city's Oxford Road. The question is how much of it will benefit Britain.

"Tomorrow's world is being shaped here in Manchester," declared Osborne at the Conservative party conference in 2011. The chancellor had met "the two brilliant scientists" that morning; now he was chipping in £50m to take their discovery "from the British laboratory to the British factory floor".

"Let's stop thinking that the only growth that can happen in Britain takes place in one industry in one corner of our country," he went on. "We're going to get Britain making things again."

At last! Proof the UK could manufacture something other than banking scandals and property bubbles. Embodied in the magic material was the hope that new industries and decent private-sector jobs might once again be created north of Watford Gap.

Which brings us back to Thursday's pre-budget report. You already know much of the chancellor's script: an energy-bill cut here, a fuel duty freeze there and the first upgrade to growth forecasts since he took office. This will be brandished as proof that Labour was wrong – and austerity is working.

Except that this recovery – built on house prices and mountainous personal debt and all the old vices – isn't the one Osborne and David Cameron wanted. When the pair moved into Downing Street, they swore that austerity would 'rebalance'' the economy towards manufacturing and business investment and exports. In other words, this was meant to be a recovery made of graphene. And the way to get it was to stop a bloated state "crowding out'' businesses.

"Ministers thought the problem was the government spending too much," says Duncan Weldon, senior economist with the TUC. "And that if they simply lowered corporation tax and cut the cost of capital, companies would invest more."

On that score, Osbornomics has been an undeniable failure. According to official forecasts from June 2010, business investment should have risen 35% by now; it's only increased 1%. Nor has the promised export boom turned up, despite the pound's plunge making our goods much cheaper abroad.

Those figures will probably improve over the next couple of years, but not by enough to change the basic picture: Britain is stuck with the same busted economic model that tipped it into the crash. That's exposed by how, just a few months into our first growth spurt in three years, economists and politicians are already fretting about a bubble.

Our record with graphene has been similarly dismal. Consultants calculate that China has taken out more than 2,200 patents on the material; the US more than 1,700; South Korea is closing in on 1,200. And the country that discovered it? Just over 50.

True, patents don't equal profits, and some Americans can't arrange their alphabet spaghetti in a novel fashion without demanding copyright – but this wasn't the way it was meant to be.

On the one hand, Britain can't spearhead the work on a revolutionary material that was discovered at one of its universities. On the other, the UK can't break its pathological focus on property and credit – despite five years of post-Lehman handwringing by politicians of all stripes.

The two failures are more than linked; the disappointment over graphene helps explain the bigger problem of why the economy remains stuck in its deep rut. Which is why I've come to Manchester: if the political class won't tackle the broader debate, we should see what the scientists have to say.

The first thing you notice about graphene in the city of its birth is how dependent it is on public money. The majority of the Osborne cash is going towards a new graphene institute at Manchester University, to be opened in 2015. But while £50m (now upped to £60m) of public cash on graphene research sounds a lot, Manchester academics believe South Korea's Samsung is spending about five times that on one application – in mobile phones – alone.

British scientists are used to doing more with less: compare the millions spent on Beagle 2 against the billions ploughed into Nasa's Curiosity budget. Even so, the Samsung money puts into perspective the classic Whitehall dilettantism of chucking some spare change at a new idea and hope it does some good.

Nevertheless, the university has more than 100 researchers beavering away at it and appointed a press officer to the material. Plastered across the marketing is the boast: "Potentially the most important discovery of the century".

Thankfully, the academics are more blasé. The lab of the famed discovery is used to store mountain bikes. One of the Nobel award-winning pair, Sir Kostya Novoselov, lumbers out of his room. It's smaller than a BBC middle-manager's office, and the desk is dominated by a fluoro-pink bottle of Vanish. Dumbbells are scattered on the floor. Next door is senior partner Sir Andre Geim. Life as a Nobel laureate has brought one major benefit.

"When the vice-chancellor asked what I wanted, I didn't talk about money: I mentioned parking." Hang on: you'd just scooped the biggest prize in physics and all you asked for was better parking? "Yes, it was a 15-minute round trip to my car. But it changed that afternoon!"

The man colleagues liken to a modern Leonardo da Vinci beams at the memory. Not that Geim underestimates the value of what he and his colleagues are doing. Without innovations such as graphene, he says, societies don't progress. "The consequences of a lack of new knowledge is decades of stagnation: the next generation will be poorer than this one."

"Curiosity-driven research" is how Geim describes his work – which perhaps explains why he once used magnets to levitate a frog. Since discovering graphene he's cut back on the playful stuff to work more closely with business – and the experience has been disillusioning. "The big multinationals come here to spend a couple of hours learning about graphene – once or twice. Their impression is: 'Aha! It's not close enough to market.'"

And they're right. But such applied research would previously have been done by giant British companies (think ICI or GEC) at their own labs. Now either those names have died, or their appetite for innovation has.

The decline is tackled head on in a recent Sheffield university paper by Professor Richard Jones, another physicist and pro-vice-chancellor of research there. He writes: "In 1979 the UK was one of the most research-intensive economies in the world. Now, amongst the advanced industrial economies, it is one of the least."

Competitors such as the USA, Japan, France and Germany have all maintained or increased their spending on research; South Korea and China have begun to spend a lot more. In Britain, however, there has been a fall in the proportion – led by the private sector.

What Jones and Geim are talking about is a deep corporate myopia – and you can see what it looks like less than half an hour's drive from the University. Out at Blackley, on the city's outskirts, ICI used to maintain one of the biggest industrial research centres in the world. From here, they developed colour-fast dyes, the anti-malarial drug Paludrine and the first modern mass spectrometer, without which much contemporary lab analysis would be unthinkable. They also gave mankind polyester.

Blackley would be exactly the kind of place that would once have taken graphene to supermarket shelves. With its famously deep pockets, ICI was able to swallow the cost of riskier development work. But the conglomerate is long gone, broken apart by would-be corporate raiders and investment bankers and big-money lawyers. ICI's premises at Blackley used to snake along the River Irk and it would take employees well over half an hour to walk around it. The old corporate tower is still there, used as a business park for high-tech tiddler firms. But where there once sprawled all that research and manufacturing capacity is now rows of new housing.

Which leaves the academics trying to fill in for the old corporate labs. Geim tells me of dinner a couple of years ago with senior staff from one of the corporate children of ICI, pharmaceutical giant AstraZeneca. "They were complaining … about how their stock price never went up. So I told them, 'Shut your lab at Alderley.'"

He was being caustic: the hub at Alderley Park in Cheshire has been doing cutting-edge drug research for more than 40 years. "They laughed: 'It will never happen.' Then this summer Alderley's closure was announced. And I looked up their share price and it had rocketed."

Here is one of the world's great scientists, pointing out that British businesses are either incapable or unwilling to use his inventions. The effect is rather like James Watt complaining that he can't find any takers for his new steam engine.

"I've talked with James Dyson for over a year, but we couldn't make it work," Geim says. "It breaks my heart to say this, but the nearest company that would take what we could offer was in the Far East."

Originally a Taiwanese company, Bluestone announced a £5m deal this autumn to open a production plant in Manchester. That too is part of a new trend: 2011 was the first year ever that more money was spent on research by foreign-owned firms in Britain than by British-owned businesses.

Without an industrial base, Britain will not be able to turn cutting-edge research into commercial opportunity and jobs, believes Sheffield's Jones. He spent part of last decade advising the government on how to build up Britain's nanotech sector. "It was meant to be a $100tn industry," he says. And it's already changed everything from car bumpers to sunscreen, but over here "it's ended up as "three men, a dog, and a cabinet full of patents".

"The IP [intellectual property] by itself isn't enough. You need knowhow – the knowhow to work out which products your new technology should actually go in, the knowhow to make it in a factory, and to do the marketing".

In which industries does Britain have this knowhow? "Aerospace. Some areas of electronics. We've got the hang of making cars again, even if we don't own the actual car firms. Pharmaceuticals."

A long pause. So, quite a short list? "Yeah." Which leaves the public sector again trying to fill the gap. Dr Branson Belle used to research with Geim, but now heads a tiny firm called 2-DTech on the edge of the university campus. Such outfits are normally called spin-outs; yet where they were once seen as a nifty way for universities to make a bit of institutional pocket money, Belle's company is essentially a stand-in for the private sector. And as he and his business brain Mark Shepherd freely admit, it's tough going.

Which isn't to say they're not trying all the levers that politicians love to talk about. Venture capital? The industry's too small, apparently. "Here we'd be lucky to get £2m; in America they'd give you £10m off the bat." What about all those government business funding schemes? "A good idea but you try getting money out of them," says Mark. One by one all those bits of ministerial handwaving about creating enterprise culture get dismissed.

"How much did the government spend on rescuing RBS?" asks Belle. It's a rhetorical question. "That tells you all you need to know about Westminster's priorities."