Mises Daily Articles
The Wicked Work of Medical Patents
In its April 2011 issue, Inc. (a publication dedicated to small-business entrepreneurs) ran an extraordinary article on Raymond Damadian, inventor of magnetic resonance imaging (MRI). Damadian and his team of research scientists spent the 1970s developing a machine able to track cancer in the human body more efficiently than any existing method at the time. They started with measuring the rate of decay of potassium in bacteria in 1969, then moved on to finding cancer in rats in 1970. By the summer of 1977 Damadian had achieved the first human MRI scan. In 1980 Damadian formed the company Fonar and released the first commercial scanner. The result was explosive.
Damadian's invention was a major medical breakthrough. Noting the prevalence of MRI procedures in hospitals today, it does not require a doctor — which I am not pretending to be — to take note of the importance of the technology for today's medical procedures. Whatever the machine's pros and cons, certainly those who have had their cancer discovered through an MRI can attest to the technology's impact.
What makes the article extraordinary, though, is not the virtuous story of an entrepreneur changing the world. What is stunning is how the article turns from a tale of invention into the all-too-common narrative of government-enforced monopoly. Worst of all, Inc.'s feature on Damadian and his MRI takes the side of the monopolist, casting a dark shadow over his corporate competitors and ignoring whatever consequences may have been endured by the would-be consumers of Damadian's creation.
Soon after Fonar began producing the QED 80, the world's first commercial MRI scanner, Damadian began to face heavy competition from much larger manufacturing companies, including General Electric, Siemens, and Johnson & Johnson — which, according to the article, "began work on its scanner in 1979," well before QED 80 was put into production. Fonar was unable to compete with more reliable manufacturers. Thus, Fonar turned to government and its army of bureaucrats. While an early lawsuit against Johnson & Johnson failed on account of the judge reversing the jury's decision, by 1990 Damadian's luck began to turn around.
Aided by the same lawyers who had helped Honeywell, a leading international manufacturer, win a patent case against Minolta, an important Japanese manufacturer of camera lenses and accessories and office products, Damadian opened a case against General Electric. Damadian attacked General Electric on account of two patents: the original MRI and a new technique developed afterward for the purpose of scanning the spine. Fonar won the case, and despite an attempt by GE to push for an overruling of the decision, GE was forced into paying $128 million to Fonar. Other competitors settled outside of court.
The moral of the story that the article communicates is clear: thank goodness for patents, government, and public law, because otherwise the big, bad corporations would have gobbled up Damadian and Fonar by outcompeting them on the marketplace. It is a classic David-and-Goliath narrative, with Damadian filling the role of David and his competitors Goliath. Damadian, unfortunately, overlooks certain important details.
General Electric, Siemens, and Johnson & Johnson were able to outcompete Fonar because they were offering a product that appealed to the consumer to a much greater degree than Fonar's. Whatever the reason may have been, the fact remains that Fonar's scanners were considered less desirable than others, whether it be an issue of reliability, cost, or whatever else may factor into the decision to buy MRI scanners. The act of denying them the ability to produce the product forces the consumer to buy from Fonar, which was selling an inferior product. The fine enforced by courts was akin to punishing GE for best serving the consumer.
Most appalling of all, many readers would initially side with Damadian and Fonar. Surely some could respond with a diverse palette of excuses as to why Damadian was in the right and his competitors in the wrong: if not for patents, why would Damadian bother developing new technologies? Well, his competition did not stop Damadian from developing that procedure for scanning human spines — after all, some profit is better than no profit at all. Maybe allowing Damadian to succumb to competition is unfair. But who gets to decide whether it is Damadian or the consumer who is cheated at the expense of the other? Who gets to decide what is fair and what is not?
Many of those who side with Fonar may be the same who champion socialized healthcare or otherwise support some measure of medical subsidization for the poor. Certainly, the bureaucrats who put into motion these patent laws and then enforce these rules in bureaucracy-owned courts are the same bureaucrats who turn around and supposedly defend the consumer against rising healthcare costs.
But the fact remains that these types of patent laws and their consequent enforcement hurt the consumer. They are one of many driving forces behind rising medical costs. It is not just MRI machines. It is prescription drugs, other advanced medical machine technologies, medical procedures, research, etc. These legal boundaries restrict innovative entrepreneurship and the market's ability to exploit profitable opportunities to satisfy the consumer at a progressively superior degree. It is difficult to know just how much greater our sphere of medical knowledge would be if we lived in a freer society, but without a doubt our current state of medicine — no matter how advanced as compared to before — is far from where it could have been.
In 2001, six years after Damadian won his patent case against General Electric, Fonar released the first upright MRI machine. Enjoying a virtual monopoly on production, Fonar is currently its only manufacturer — no doubt legally protected through patent law. The article proudly states that to date 140 machines have been distributed worldwide. How many more would have been produced and distributed in the absence of such legal limitations? How many more medical consumers would enjoy these fruits of entrepreneurial innovation? What other technologies could have been developed based on this standing MRI scanner? These questions are conveniently ignored.
For Damadian, though, glory is not in serving the consumer — it is in protecting his profits. Yet most people cheer him as a knight, fighting against the greedy corporations looking to steal his hard-earned income. They fail to realize the misery Damadian, and the bureaucrats who cater to businessmen like him, bring them by denying them the greatest benefits of these new technologies.
The point is not to berate profit-seeking entrepreneurs. All individuals, in some way, search for profit. All human action is designed to exchange one state of being for another, more preferred state. The benefits of self-serving action have already been well documented. As Adam Smith wrote in 1776, "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest." Profit-seeking entrepreneurs are the keystone of the society and wealth we enjoy today.
However, when individuals act in a market they are constrained by the actions of other individuals. Through the division of labor, society has inadvertently (an example of Hayekian "spontaneous order") developed economic forces that emplace boundaries directing the movement of factors of production and the goods they produce. The market is a web of individuals seeking what is in their own self-interest. But ultimately the winner is society as a whole because what is in one's self-interest, when acting within market constraints, is to fulfill the desires of others.
Government, though, is not inhibited by these same boundaries. Instead, the state operates outside the boundaries of the market. It allows the politically savvy businessman to avoid market constraints and instead exploit bureaucracy's monopoly on power to snatch profit at the expense of society as a whole.
This is what sets apart the profit-seekers at General Electric from Damadian in the case of the MRI scanner (this is not to suggest that in other cases General Electric does not itself exploit government to its benefit). General Electric's actions served the consumer by providing a better product. Damadian used government to secure his earnings at the expense of the consumer. How many Damadian sympathizers are willing to admit to simultaneously sympathizing with Damadian's crime against society?