The Abbott government is still considering an inquiry into claims that iron industry giants are forcing down prices and driving out smaller rivals.

The idea was prompted by the anger of Fortescue Metals Group chairman Andrew Forrest, who says Rio Tinto and BHP Billiton are working together to force others out.

Mr Forrest has been rabidly pursuing the point.

He has gathered support from smaller producers such as Atlas Iron, BC Iron and US company Cliffs Natural Resources, he has called for a cap on iron ore production, and wants everyday 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”.

Mr Forrest has even launched the “Our Iron Ore” campaign to gather more support for an inquiry.

Now, a former BHP Billiton chairman has warned that government intervention would make the nation non-competitive and send mixed signals about Australia.

“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,” Don Argus, also a former National Australia Bank chief executive, told News Corp reporters.

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

Mr Argus said if governments really want to know what is happening in the industry, they should ask officials in Industry Minister Ian Macfarlane’s department.

He said he was “aghast” that politicians had not simply contacted 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”.

Tony Abbott says “an inquiry may well be a very good way” to get to the bottom of the “claim and counterclaim” situation within the market

He said any inquiry would not operate as a “witch hunt”, because “one thing you will never find from this government is any attempt to regulate a market which is working well”.

Other LNP figures have confirmed that questions about an inquiry will put to the cabinet soon.

Labor competition spokesperson Andrew Leigh says that once parliament writes competition laws, it should be up to the competition watchdog to administer them.

Minerals Council of Australia CEO Brendan Pearson says that if Australia is truly committed to open markets, it should not “junk that proposition as soon as one producer finds the commodity price cycle uncomfortable”.

Andrew Harding, the head of Rio Tinto’s iron ore arm, says any inquiry would only find that the iron ore market was operating freely, openly and normally, but would create risks of its own.

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

“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.”