Former BHP Billiton chairman Don Argus has warned Australia would become a “laughing stock of the world” if the government ¬intervened in the iron ore market.

As the Abbott government considers an inquiry into claims by Fortescue Metals Group chairman Andrew Forrest that industry giants Rio Tinto and BHP Billiton have been forcing down prices and driving out smaller rivals, Mr Argus warned that intervention would make the nation non-competitive and send mixed signals about whether Australia was a command economy or a market economy.

“We will be a laughing stock of the world because, in a market economy, prices will determine what is produced, how it’s produced, and who will get the things we make,” Mr Argus, also a former National Australia Bank chief executive, told The Australian.

“A market economy uses prices as signals telling us how to use ¬resources.”

He sounded a note of caution that the proposed inquiry could become a “political football” and expose very sensitive commercial information to offshore buyers of iron ore. Officials in Industry Minister Ian Macfarlane’s department could already be called on to seek an explanation of the “various” components that drove iron ore pricing.

Mr Forrest has been leading the call for the inquiry and found support from smaller producers such as Atlas Iron, BC Iron and US company Cliffs Natural Resources. In March, Mr Forrest called for a cap on iron ore production. Last week, Mr Forrest urged Australians to lobby the government to “consider the multinationals’ ¬licence to operate in Australia if they don’t market Australian iron ore responsibly for all Australians”. On Sunday, an “Our Iron Ore” campaign was launched to gather support for an inquiry.

Mr Argus said an inquiry was not needed.

“If you don’t understand something, sit down with the miners and talk to them, they will tell you,” he said.

“It’s just ¬beyond my comprehension how anybody would even be thinking about it.”

He said he was “aghast” that politicians had not used officials from Mr Macfarlane’s department “to get an explanation of how pricing is done” given that they are “a very talented group of people and understanding of the resources industry”.

Independent senator Nick Xenophon has continued to push for an inquiry. Tony Abbott flagged an inquiry last Friday, and yesterday said he wanted to get to the bottom of the “claim and counterclaim” being made within the market. “An inquiry may well be a very good way of doing that,” the Prime Minister said.

He said an inquiry could not be a “witch hunt”, vowing that “one thing you will never find from this government is any attempt to regulate a market which is working well”.

While there has been speculation the terms of reference could be released shortly, others insist the government will take a more cautious approach and is open for an inquiry to be done by a regulator or statutory body.

Mr Macfarlane and Trade Minister Andrew Robb confirmed yesterday that the government’s leadership group was seeking views but no decision had been made.

“No decision has been taken as yet but the leadership group have, quite appropriately, been canvassing views — various views — amongst various colleagues,” Mr Robb told ABC radio.

“I’ve put my views, as others have, to the leadership group and it’s up to them to weigh up the merits of all the views that have been put to them, and to make a decision for the government,” Mr Robb said.

Mr Macfarlane said: “My understanding is that this is a discussion which the cabinet will have.”

Labor has said it would participate in the inquiry if it goes ahead, but competition spokesman Andrew Leigh said there could be “potential threats to investment if the government’s rhetoric gets out of hand”. Dr Leigh told Sky News that parliament should write competition laws and leave it to the competition watchdog to administer them.

The iron ore spot price peaked at more than $US180 a tonne in early 2011, but has fallen sharply in the past 18 months to as low as $US47.08. Iron ore is currently trading about $US61 a tonne.

The sharp price fall has wiped off billions of dollars in tax and royalty revenues, and has been felt most keenly in Western Australia.

Last week’s West Australian budget showed that the state had had to adjust its revenue expect¬ations for the next three years by $12 billion after slashing its iron-ore price projections.

In last week’s federal budget, the fall in the iron ore price wiped $20bn from forecast tax collections compared with the previous budget.

On the push for intervention in the market, Mr Argus echoed warnings that Australia would risk giving up market share to Brazil’s Vale and other producers, saying that Vale and Brazil would be “salivating at this”.

“If anybody was thinking about investing in Australia, they would be thinking twice, I think,” Mr Argus said.

Minerals Council of Australia chief executive Brendan Pearson said Australia had to decide whether it was committed to open markets, and whether we “junk that proposition as soon as one producer finds the commodity price cycle uncomfortable”.

The comments by Mr Argus were echoed by the head of Rio Tinto’s iron ore arm, Andrew Harding. He said any inquiry into iron ore would not only find that the iron ore market was operating freely, openly and normally, but would also send a worrying signal to major trading partners.

“Australia has been a global champion of free trade and open markets,” Mr Harding said.

“These have underpinned our economic development. We should be careful not to disturb this hard-earned reputation. Our global standing as a supporter of open markets has already been undermined by calls to cap iron ore production and for government intervention in the market.”