How free marketeers survived the fitness test and devoured Theresa May

The dramatic disintegration of the British government before our very eyes lays bare certain truths about British politics that are largely hidden most of the time. They may help us understand forthcoming events, as Theresa May has been ruthlessly driven out of the leadership of her party and her country.

One truth is that the underlying basis of the Conservative party is an uneasy truce between a pragmatic, privileged, patrician, patriotic and paternalist establishment that believes in an ethos of public service and a conviction that the Tories are the natural party of government; and a radical insurgency that sees the primacy of free-market economics as the fundamental guiding principle, with "shrinking the state", lower taxes, privatisation and deregulation as the way to achieve it.

The former, whom we could call the Five P Tories, are open to the idea of social justice but are instinctively not ideological. If they like lower taxes this is mainly because they and people like them pay a lot of them. But they are One Nation Tories, who view those less fortunate than themselves in a spirit of "noblesse oblige". The Welfare State is a necessary concession. They prefer the status quo to any alternative, which means in Brexit terms they are natural Remainers. They don't like radicalism, of right or left. The thought of leaving the EU without a deal appals them. In so far as they have any interest in economics, they would, of the available options, be happiest with John Maynard Keynes.

The free marketeers, who make up the bulk of the ERG group in the House of Commons and are sometimes called the Spartans, see the EU as an obstacle to the economic libertarianism they dream of. It is an individualistic creed which espouses competition as a sometimes painful surgical remedy for inefficiency – those who come off best are those who deserve to do so.

They are disciples of Frederich von Hayek, a radical economist and philosopher who was Keynes's main opponent, and they are excited by the thought of creative destruction – as long as it does not affect them.

The Five P Tories were the dominant element in the Conservative Party right up to the election of Margaret Thatcher, but she lacked an economic preference of her own and was talked into Hayekian economics by Sir Keith Joseph. He gave a notable series of lectures on the subject, gathered a following of acolytes, and became close to her. Her own instincts were not those of an economist at all but of a prudent housewife.

Behind the scenes the Institute for Economic Affairs lobbied and argued tirelessly in favour of the free market, and it was the IEA and Joseph between them that gave rise to Thatcherism. There was no mention of it in the 1979 Tory manifesto which brought her to power. But under her the patrician brand of Conservatism, once represented by, say, Harold Macmillan, gradually gave way to the free market brand. The balance in the Cabinet tipped further that way with each reshuffle. And this process coincided with the emergence of Reagonomics across the Atlantic, and its unequivocal view that what powered the economy was private enterprise and the job of the State was simply to get out of the way.

Thatcherism and Reagonomics tended towards Hayek's view that the whole concept of social justice was absurd. Market forces should be the only determinant of public policy, and provided the only means for assessing the results. It is easy to see why, under Thatcher, privatisation became a major instrument of public policy.

These two kinds of Conservatism are not necessarily replicated in the population at large, which is bored or mystified by ideology but open to persuasion by simple slogans and recognisable brands and personalities. MPs of each type sit side by side on the Tory benches in the House of Commons, despite the philosophical chasms between them. The Five P patrician kind of Toryism and the free-market kind have often fought out their ideological conflicts through proxies, and Brexit provides a perfect example. The EU, in its present manifestation, is regarded as an obstruction to the working of free markets. With globalisation, the whole world is now the market place where Britain has to compete, which means making trade deals independent of the EU. The NHS was a recent proxy battlefield, with efforts to introduce an internal market but also to open it up to the private sector.

Membership of the EU customs union makes that impossible. So getting the UK out of the EU became a major goal of free market policy. Similarly the EU imposes a raft of regulations about employment practices and safety standards. Free marketeers are not necessarily against them in principle but want them to be shaped by market forces, not Brussels bureaucrats. They are intuitively "No-dealers", and regard the likelihood of economic turbulence, and the hardship it may cause, as a necessary dose of medicine to make Britain more competitive.

Their economic philosophy goes with an anthropology that sees people as economic individuals who naturally pursue their own rational best interests. If everybody does so, then "as if by an invisible hand" (Adam Smith) general prosperity ensues. These views are often held with a fervour that is quasi-religious in its intensity.

So as the battle to decide Theresa May's successor is joined in the next few days and weeks, one can look out for the tell-tale signs among the candidates to work out which is a free marketeer and which a Five P patrician. Attitudes to public expenditure – and therefore taxation – are crucial. Even more telling will be attitudes to capitalism. Tory free marketeers want more of it, while Tory patricians see grave problems with the present version and want reforms.

There is a third category, the chancers, who have no principles of their own and pretend to believe in both the other two, depending on who they are talking to. They will bow under pressure, and most of the pressure, since Brexit began, has come from the free marketeers. Mrs May is by habit and upbringing a patrician. Those who hope to come after her will see how she was devoured, and take note accordingly.