Vince Cable has attacked the Tory right-wing, and pledged to take on "old-fashioned, backward-looking" thinkers who claim tax cuts for the rich will fuel economic growth.
Hitting out at "Conservative backwoodsmen", the Business Secretary insisted it was the Lib Dems' job to confront those who "stroke fat cats until they purr with pleasure".
He attacked those who believed cutting workers' rights would revitalise British business.
Addressing party members at the Lib Dems' spring conference in Gateshead, Cable said: "What we must do is to intervene to support growth and new jobs.
"And as Liberal Democrats in government we must confront the old-fashioned, backward-looking, negative thinking which says that all government needs to do to generate growth is to cut workers' rights, slash taxes on the rich, and stroke 'fat cats' until they purr with pleasure.
"I am sometimes told that I am single-handedly blocking the Government's deregulation agenda. In fact my excellent team of Lib Dem and Conservative Ministers is doing more to stop or reverse unnecessary regulation than any previous government.
"If my critics really mean it, let us join in supporting business demands to hack away at the impenetrable red tape which makes our tax system such a nightmare for small businesses.
"And let's cut through the time-wasting bureaucracy around foreigners working and studying here when they have every right to be in Britain. That's what business means when it talks about 'anti-business' policies."
Cable told activists that as Liberals genuine competition was vital but the social democratic streak of the party meant "recognising that markets can and do fail".
He added: "These days I am amused rather than offended when I come under attack from some Conservative backwoodsmen - one recently identified me as a member of the Socialist Workers Party: that for advocating policies which would be considered mainstream in successful Scandinavian countries or Germany or France, or even in that socialist paradise, the United States."
He continued: "The problem is that there are two crude stereotypes here: the British for free enterprise, the Continentals for state control.
"But we, as Liberal Democrats, believe that active government can be a force for good, working with the grain of markets. That's why I am developing an industrial strategy at the heart of the Government's commitment to grow our way out of Labour's grim legacy of debt and broken banks."
Cable admitted the Government needed to do more to get banks lending to small firms, warning of a "serious risk that recovery will be throttled by lack of finance".
He renewed his assault on top pay, telling delegates there was "no justification" for the soaring salaries and bonuses handed out over the past decade.
He promised to pursue an "active government" strategy to boost British industry, through initiatives like the Regional Growth Fund, support for apprenticeships and a new approach to Government procurement to ensure that UK companies are considered for major contracts.
The Secretary of State took on critics by insisting that Government cannot "sit on the sidelines" when it could be taking action to support
businesses.
In a letter to the Prime Minister leaked earlier this week, he advocated splitting up the largely state-owned Royal Bank of Scotland to create a British Business Bank with a mandate to expand lending rapidly to sound enterprises.
He told the conference: "In the aftermath of the banking crash there is a serious risk that recovery will be throttled by lack of finance.
"If Britain is to emerge from this dreadful crisis, business needs access to finance, just as plants need water - and the banks aren't supplying it.
"We can get the partly state owned-banks to lend more. This has been done to a degree, but we must do more.
"We can also try to mobilise some new sources of funding - supply chain finance from big companies; business angels and venture capital; pension funds and insurance companies, investors in a potential industrial bank - this has already been happening, but will move faster with Government support."