AS WE SAW IN THE PREVIOUS MODULE, repression is a normal aspect of psychosexual development, according to Freud; NEUROSIS too need not in every instance be seen as negative. A neurosis is the formation of behavioral or psychosomatic symptoms as a result of the return of the repressed. Freud writes that there are indeed cases in which the physician himself must admit that the solution of a conflict by a neurosis is one of the most harmless and most tolerable socially (Introductory Lectures 16.382); indeed, Freud goes so far as to argue that even "ostensibly healthy life is interspersed with a great number of trivial and in practice unimportant symptoms" (Introductory Lectures 16.457). The neurotic that needs treatment simply has more debilitating symptom-formations that prevent enjoyment and active achievement in life. A psychosis, by contrast, refers to when a patient has completely lost touch with reality. Freud originally distinguished between neurosis and psychosis in the following way: “in neurosis the ego suppresses part of the id out of allegiance to reality, whereas in psychosis it lets itself be carried away by the id and detached from a part of reality” (5.202).

In general, a neurosis represents an instance where the ego's efforts to deal with its desires through repression, displacement, etc. fail: "A person only falls ill of a neurosis if his ego has lost the capacity to allocate his libido in some way" (Introductory Lectures 16.387). The failure of the ego and the increased insistence of the libido lead to symptoms that are as bad or worse than the conflict they are designed to replace. The ego generally perceives "an advantage through illness," as Freud terms it; the symptom, that is, allows the ego to side-step the conflict between his ego and his id through a symptom that allows him to experience pleasure in an alternate (if often debilitating) fashion. The symptom is a substitute for the instinctual impulse but one that is so reduced, displaced, and distorted that it is often not recognizable as a gratification but looks more like a compulsion or even an illness. Example: the obsessional neurotic's compulsion to clean. Once such a symptom is put in place, the ego will often reinforce it by rationalizing and taking advantage from the behavior (it is good to be clean; look how much more conscientious I am than others.) The more ingrained and rationalized a symptom becomes, the more resistant it will be to the psychoanalytical cure.

Neuroses can be caused 1) by internal impulses that are improperly repressed by the ego and that, therefore, find alternative expression; or 2) by external traumatic events (a sexual encounter, sexual abuse, war trauma). Usually, a combination of 1) and 2) is required for the neurosis to manifest itself; however, Freud soon came to realize that the line between phantasy (1) and reality (2) can be difficult to determine and, so, "we should equate phantasy and reality"; indeed, we should "not bother to begin with whether the childhood experiences under examination are the one or the other," for "in the world of neurosis it is psychical reality which is the decisive kind" (Introductory Lectures 16.368). In other words, memories of childhood trauma (incest with the father, viewing one's parents copulating [what Freud terms the "primal phantasy"]) can sometimes be completely constructed (pure phantasy) and yet nonetheless function as traumatically as if they had actually happened.

According to Freud, there are a number of classes of neuroses:

narcissistic neuroses: megalomania, melancholia. Freud saw these neuroses as particularly difficult to cure because the patient has developed in such a way as to refuse interaction with other people, thus making a talking cure with an analyst difficult.^Note

transference neuroses or "psycho-neuroses": when one's desire for an external object is transferred to phantasies that then take the place of real sexual gratification. Included under this general category are:

• hysteria, including 1) conversion hysteria, in which the symptoms are manifested on the body (eg. psychosomatic illness); and 2) anxiety hysteria, in which one feels excessive anxiety because of an external object (eg. phobias).
• obsessional neuroses: here a sexual impulse is substituted by obsessive thoughts and compulsive behaviors (eg. obsessive cleaning or minutely-repeated ceremonial acts).

traumatic neuroses: given that he experienced the results of the first world war, Freud was especially familiar with the neuroses caused by the trauma of war; however, any number of traumas can lead to neuroses (eg. rape). See the next module on trauma and transference. What distinguishes traumatic neuroses from other neuroses is the fact that the cause of the symptoms does not stem, for the most part, from the unconscious or psychological conflicts but from an actual (and, often, immediate) traumatic event.

Freud also distinguished between actual neuroses and "psychoneuroses"; actual neuroses pointed to actual problems in sexual functioning (eg. neurasthenia, which Freud saw as resulting from sexual excess, and anxiety neuroses, which Freud saw as being caused by unrelieved sexual stimulation). Psychoneuroses, by contrast, are the result of past events and psychological conflicts involving the unconscious, and include all the transference neuroses listed above.

The treatment of neurosis consists of making conscious some of the unconscious until "we transform the pathogenic conflict into a normal one for which it must be possible somehow to find a solution" (Introductory Lectures 16.435). However, simply stating the "truth" of a patient's neurosis is often not enough, since the work of repression is such that the patient may hear the analyst's words but not believe them or perhaps allow the "truth" to stand alongside a continuing illness.

A good example of this tendency for the truth to stand alongside the symptom is in fetishism, the displacement of sexual desire onto alternative objects or body parts (eg. a foot fetish or a shoe fetish), caused by the subject's confrontation with the castration complex. Freud came to realize in his essay on "Fetishism" that the fetishist is able at one and the same time to believe in his phantasy and to recognize that it is nothing but a phantasy. And yet, the fact of recognizing the phantasy as phantasy in no way reduces its power over the individual. Zizek builds on this idea in theorizing the nature of ideology.