Eamonn Butler: Regulation is the competition killer

I KNEW that Business Secretary Vince Cable didn't understand business. Now it seems he doesn't understand Adam Smith. He told the LibDem conference: "Capitalism takes no prisoners and kills competition where it can," and claimed to have the backing of Adam Smith in that remark. What nonsense.

It is not capitalism that kills competition. It is government and regulation. The biggest monopolies – the mail, schools, the BBC – are run by the government. The least competitive industries – utilities, banks – are those with the heaviest regulation.

Smith, the great Scottish father of economics, had no illusions about business people. He knew they would love to squeeze out their competitors. And he knew that they form cartels to raise prices for consumers. That is why he wrote: "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."

I am sure this is the passage Cable was thinking of. But he seems unaware that, in the very next paragraph, Smith went on to explain how government regulations helped businesspeople make these conspiracies stick.

After all, in open competition, it is hard to maintain a cartel. The first person to cheat on the deal and lower prices will get more customers. The great benefit of competition is that it forces each business to strive to outperform others, by producing better goods at lower prices.The trouble comes when businesses call on the power of governments. They demand legislation to "keep out the cowboys", but they are just using government power to corner the market. Big business in particular loves regulation – it keeps out smaller, more innovative competitors.

Government policy should focus on increasing competition, ensuring trade is honest – and on reducing other regulation. Just as Adam Smith said. I shall be sending Vince Cable a copy of my book Adam Smith – A Primer. He seems to need it.

• Dr Eamonn Butler is director of the Adam Smith Institute.