Leading article: Private money and public interest

As ever, fools rush in. Those who stumbled over themselves to paint Vince Cable as a wild-eyed Marxist on the basis of early extracts from his Liberal Democrat conference speech were left with egg on their faces yesterday when the Business Secretary delivered a classic defence of regulated free markets. But the furore did serve to highlight a prominent and malign feature of official attitudes towards the private sector in Britain.

For the past three decades there has been a free market fundamentalist ideology at work in political life; an assumption that the public good is automatically served by leaving the private sector to its own devices. This view took hold under Margaret Thatcher's administration and reached near dominance under New Labour. And it was this laissez-faire instinct which reared its intolerant head when reports emerged that the Business Secretary would be daring to criticise some aspects of private-sector behaviour.

It is certainly true that free markets, which drive up quality and drive down price, are the best way of delivering the goods and services that people want and need. But the idea that the private sector always and everywhere promotes the public interest is a dangerous delusion. The reality, as Mr Cable pointed out forcefully yesterday, is that private firms, when left entirely to their own devices, often work against the public good, rather than enhancing it. They behave in ways that undermine competition and distort markets for their own narrow advantage.

Examples of this tendency abound, and this newspaper has highlighted them. While the wholesale price of energy fell sharply in 2008 the prices charged to customers by the "big six" energy firms stayed the same. The giant supermarket groups stand accused of using their market power to bully small suppliers and to pressurise local councils on matters of planning. And, of course, the banking sector has been the source of a host of abuses in recent years, from excessive overdraft charges to the arbitrary imposition of penal borrowing terms on small businesses since the recession.

The costs to the public of a laissez-faire attitude to markets from the state manifest themselves in excessive charges and needlessly high prices. But the public costs by no means stop there. The reason Britain has one of the biggest deficits in the G20 is because the Treasury became so heavily reliant on the bubble revenues of an inadequately regulated financial services sector. Britain is facing years of savage public spending cuts largely because of the failure of successive ministers and regulators to curb the recklessness of the banks.

It is for the same reason – protection of the public interest – that Mr Cable is justified in examining the rules surrounding private sector takeovers, such as the recent acquisition of Cadbury by the US food giant Kraft. Most of these large mergers end up destroying shareholder value over the long term. And Cadbury is unlikely to be an exception. Shareholders, not ministers, should decide on matters of ownership. But it is almost impossible for shareholders who take a long-term perspective to hold out when short-term speculators arrive en masse as they do when news of a takeover attempt breaks. It is entirely legitimate for the Government to examine ways of throwing sand in the wheels of such takeovers. There is nothing in the least "anti-business" about demanding a level playing field for investors.

In recent years, ministers have tended to assume that support for free markets means blindly cheering on all private sector activity. But the interests of individual companies, or a particular sector, should not be confused with the interests of the wider economy or the general public. Mr Cable understands that distinction. We await with interest to see whether the Coalition as a whole has got the message.