If everyone with inside information could trade on it without fearing the law, they would reveal the predicted effect of said information via movements in the price of the security. Therefore, free and legal insider trading would actually increase fairness in the market.
It is amusing to me how when all these amateur game theorists create these hypotheticals to prove that insider trading is good, they always assume that there is an endless supply of chumps with an endless supply of money willing to take the opposite end of the trade. Well, let me tell you, people are not that stupid. Especially people with money.
Back in the dark ages, most people with money felt the best place to keep them was locked in a chest in the deepest room in a large castle. There was very little investment, and the dark ages were a time of extreme poverty. It is only through a long series of laws and institutions developed over couple of hundred of years, that we have reached this point of mobility of capital, which allows capital to go where it is most useful, and greatly benefits the economy. But if we remove investor protections things can slide back very easily and very quickly.