Anyone who makes an investment is automatically assuming that to at least some extent, he knows something that the market does not know. After all, if the market already knew what the individual knows, then there would be no profit to be made for the individual as the market price would already reflect what the individual knows. This means that markets function precisely because of imperfect information, and a healthy functioning market means that it is always moving in the direction of digesting all of that imperfect information (it never actually reaches a "perfect information endpoint" since information is constantly changing, but it is constantly moving in that direction). If you want to easily understand how critical imperfect information is, imagine for a moment that every entrepreneurial idea that has ever been successful, was at the time it was thought of, also thought of by literally every other person on the planet. What would be the incentive to act on that insight if everybody else already knew it? We benefit from the insights others have that we do not (the entrepreneur went ahead with his project because he knew we did not know how to do what he wanted to do, and as a result we can now use whatever it is that he created). We benefit from imperfect information.
The reason why insider trading is called insider trading is because there is presumed to be something harmful about a single person or group of individuals knowing something about a company that all other investors do not know (as if it is even possible to make sure all investors have the same information). As a result, the individuals that have the inside information about the company might be able to profit significantly from this knowledge. But doesn't each person in the world have completely different information, about just about everything, from everyone else? And doesn't each person always try to better his own life using information he hopes nobody else has? If we don't punish the already infinite number of instances in which people differ in the knowledge they possess, why do we make this special exception when it comes to investing? Once we understand how a healthy market should function, it becomes clear that people profiting from information as soon as it is available is precisely what we should want.
Let's assume publicly traded Company X has very good news that is going to be released in a few days. Scenario A is such that all the good information about the company is effectively kept secret; this information is released only after those few days go by and investors only act on this information after those few days have gone by. Scenario B is such that some individuals inside Company X begin aggressively buying the stock in anticipation of the good news and leak the information to other individuals in the marketplace who also begin aggressively buying the stock so that the price of the stock goes up well in advance of those originally intended few days. Let's now compare the two scenarios. The purpose of a market is to efficiently allocate resources given all available current and future information. If Company X has good news to deliver in a few days, it is far more efficient for the price of Company X to have capital move in its direction now thus making its price rise now (Scenario B) rather than all of this happening in a few days (Scenario A). Why should we, as market participants, accept a few days of inefficient resource allocation when we don't have to? Don't we want good companies to get rewarded as soon as possible and bad companies to get punished as soon as possible? The benefits to the marketplace of these things happening at all are much greater than worrying about who pocketed a few extra dollars in the process! A market works most efficiently when it reacts immediately to all information. Keeping inside information forcibly secret by punishing its premature release is actually harmful to a healthy functioning market, and therefore harmful to society.
Once this concern over small groups of individuals profiting from information before many other people (as if this is the only way for profits to be made) is properly understood, it becomes apparent that the support for laws against insider trading, at its most fundamental level, is actually about nothing more than what I would call "information welfare." Information welfare is the concept of trying to provide everyone with as much equal information as possible so that somehow everyone can profit from this information at the same time (as if everyone having equal information will somehow allow everyone to benefit simultaneously). It is literally an attempt to create intellectual equality that hopefully leads to financial equality. But if, as we saw above, everyone were to actually possess the same information, what would be the incentive for acting on this information if everyone else had it as well? Similarly, in a theoretically perfect socialist system, what would be the incentive for people to produce more than average if they will immediately have the surplus taken away and redistributed? Both welfare in money and information welfare might be a result of having laudable goals in mind, but implementing them is disastrous to everyone involved.
There should exist no insider trading laws whatsoever, specifically for the benefit of everyone in society. Let all insiders trade on information as soon as it becomes available. This means faster exposure of corrupt businesses as well as faster exposure of successful businesses. The sooner capital flows away from where it shouldn't be and towards where it should be, the better. Don't we want to know which companies are succeeding and which are failing as soon as possible? Do you really care if someone gets rewarded while revealing a company like Enron is a fraud? Don't you care more about knowing the company is a fraud, than if a group of individuals inside the company made money exposing to you and the rest of society that the company is operating in a fraudulent manner (and allowing you to avoid ever unknowingly subjecting yourself to the harmful ramifications of doing business with this fraudulent company)?
Rather than vilifying and punishing inside traders, we should be thanking them for the critical and irreplaceable function they serve in the market.