The national interest. It's a phrase we've heard a lot recently. David Cameron promised to defend it before flying off last week to Brussels. Eurosceptic backbenchers urged him to fight for it. And when the summit turned into a trial separation, and the prime minister walked out at 4am, the rightwing newspapers took up the refrain: he was fighting for Britain. In the eye-burningly early hours of Friday morning, exhausted and at a loss to explain a row he plainly hadn't expected, Cameron tried again: "I had to pursue very doggedly what was in the British national interest."

As political justifications go, the national interest is an oddly ceremonial one. Like the dusty liqueur uncapped for a family gathering, MPs bring it out only for the big occasions. And when they do, what they mean is: forget all the usual fluff about ethics and ideas; this is important.

You heard the phrase last May, as the Lib Dems explained why they were forming a coalition with the Tories. More seriously, Blair used it as Britain invaded Iraq.

But here Cameron wasn't talking about foreign policy; nor about who governs the country. The national interest he saw as threatened by Europe is concentrated in a few expensive parts of London, in an industry that would surely come bottom in any occupational popularity contest (yes, lower even than journalists): investment banking.

In its haste to depict events as Little Britain v Big Europe, the Tory press hasn't dwelt on the inconvenient details of last week's fight. But it was only after the prime minister failed to secure protection for the City from new financial regulation mooted by the EU that he told Nicolas Sarkozy to get on his vélo.

On one issue in particular, Cameron had a good case: Britain wants banks to put more money aside for a rainy day than the EU is considering. Elsewhere, he just looked unreasonable – what exactly is wrong with having international banking supervision? One reason for the euro crisis was that its members have 17 national bank watchdogs and barely anyone looking across borders.

Step back from what even EU officials were calling "arcane" details, though, and the big principle is this: the prime minister effectively stuck relations with the rest of Europe in the deep freeze in order to protect one sector of the economy.

In my recollection, no British minister in recent times has termed one industry as being of "national interest". "Vital" or "key"? Why, such words are the very currency of the MP's address to a trade association. But on the big phrase, I asked the Guardian's librarians to check the archives from 1997 onwards. They came back empty-handed.

Cameron is merely expressing more openly something Labour frontbenchers also believe: that the City is pretty much the last engine functioning in Britain's misfiring economy. Indeed, one of the Labour lines of attack against Cameron this weekend has been that he has left the City more open to regulation.

A few weeks ago, the shadow chancellor Ed Balls warned against any further taxes on financial trading within Europe. However, he said, he would urge a "Robin Hood tax with the widest international agreement". In other words, Balls will give his fullest support to something that has no chance of happening.

This is the same kind of political subservience towards the City, observed by the Financial Services Authority (FSA) in its report into the collapse of RBS. According to the watchdog, a major reason why Fred Goodwin wasn't checked as he drove RBS off a cliff was because of "a sustained political emphasis on the need for the FSA to be 'light touch' in its approach and mindful of London's competitive position". Had regulators been harder on the bankers, "it is almost certain that their proposals would have been met by extensive complaints that the FSA was pursuing a heavy-handed, gold-plating approach which would harm London's competitiveness".

As all British taxpayers know by now, securing the "competitiveness" of RBS has wound up costing us around £45bn.

So what is it that justifies the kid-glove treatment of the finance sector? Switch on the news and you normally hear some minister or lobbyist (come on down, Angela Knight of the British Bankers' Association) talking about the vital contribution banking makes to employment. Our tax revenue. Or the role banks ideally play in directing money to needy businesses.

These claims are repeated so often that they rarely get even the briefest patdown from interviewers, let alone backbench MPs or economists. Yet they are largely bogus, as explained in a new book called After the Great Complacence, produced by academics at Manchester University's Centre for Research on Socio-Cultural Change (Cresc). Indeed, on nearly any important measure, finance actually contributes less to Britain than manufacturing.

Take jobs. The finance sector employs 1m people in Britain. Chuck in the lawyers, the PRs and the smaller fry that swim in its wake and you are up to a grand total of 1.5m. And most of these people are not the investment bankers for whom Cameron went to war in Brussels. At the big British banks such as RBS and HBOS, 80% of the staff work in the retail business. Even if Sarkozy were to shroud Canary Wharf in a giant tricolore, those staff would still be needed to staff the branches and man the call centres. Even in its current state of emaciation, manufacturing employs 2m people.

What about taxes? Lobbyists like to point out that banks are usually the biggest payers of corporation tax, but usually omit to mention that corporation tax isn't that big a money-spinner. For their part, even leftwingers will usually assume that the bankers effectively paid for the tax credits, hospitals and schools we enjoyed under Labour.

It's not true. The Cresc team totted up the taxes paid by the finance sector between 2002 and 2008, the six years in which the City was having an almighty boom: at £193bn, it's still only getting on for half the £378bn paid by manufacturing. It would be more accurate to say that the widget-makers of the Midlands paid for Tony Blair's welfarism. But that would be a much less picturesque description.

Even in the best of times, the finance sector hasn't paid anything like as much to the state as the state has had to pay for them since the great crash. According to the IMF, British taxpayers have shelled out £289bn in "direct upfront financing" to prop up the banks since 2008. Add in the various government loans and underwriting, and taxpayers are on the hook for £1.19tn. Seen that way the City looks less like a goose that lays golden eggs, and more like an unruly pigeon that leaves one hell of a mess for others to clear up.

Ah, but what about lending? After all, this is why we have banks in the first place: to channel money to productive industries. The Cresc team looked at Bank of England figures on bank and building society loans and found that at the height of the bubble in 2007, around 40% or more of all bank and building society lending was on residential or commercial property. Another 25% of all bank lending went to financial intermediaries. In other words, about two-thirds of all bank lending in 2007 went to pumping up the bubble.

This doesn't look like a hard-working part of an economy humming along: it's nothing less than epic capitalist onanism.

If the statistics don't support the arguments for the City's pre-eminence, the public don't either. In 1983, 90% of the public agreed that banks in Britain were well run, according to the British Social Attitudes survey. By 2009, that had plunged to 19%.

In other words, both the evidence and the voters are against investment bankers. So why do the politicians cling on to them?

Part of the answer is financial. Bankers used the boom to buy themselves influence – so that, according to the Bureau of Investigative Journalism, the City now provides half of all Tory party funds. That is up from just 25% only five years ago.

Another part must be cultural. Running this government are two sons of bankers. Cameron's father was a stockbroker, Clegg's is still chairman of United Trust Bank (and famously helped his son get some work experience). For its part, Labour spent so long outsourcing all economic thinking to Gordon Brown and Ed Balls that it has long lost the ability to argue against the orthodoxy of giving the City what it wants.

In a poorer country, the cosiness of relations between bankers and politicians would be scrutinised by an official from the World Bank and disdainfully pronounced as pure cronyism. In Britain, we need to come up with a new word for this type of dysfunctional capitalism – where banks neither lend nor pay their way in taxes, yet retain a stranglehold on policy-making. We could try bankocracy: ruled by the banks, for the banks.

What are the results of bankocracy? It means that the main figures arguing for a Robin Hood tax are the Archbishop of Canterbury Rowan Williams and Bill Nighy. It means that opposition to the rule of banks isn't found in Westminster, but in tents outside St Paul's or among a few grizzled academics and NGO-hands – with no political vehicle to carry them. Meanwhile, the politicians declare that the national interest of Britain can be defined by what suits one square mile of it.