All of the hubbub surrounding Martha Stewart’s recent stock trades, which involves allegations that Ms. Stewart sold shares of biotech company ImClone based on inside information that the company was about to receive unfavorable news from the Food and Drug Administration about its cancer drug Erbitux, puts us in a mind to reflect on the nature of insider trading itself. We certainly believe that market players should obey, and the government should enforce, the laws on the books. But there is an argument to be made that if the government refrained from trying to prevent trades based on non-public information the average investor would fare better on the whole than under the current regime.

Sam Waksal, the former CEO of ImClone who has been arrested on insider trading charges, is accused of advising his father and one of his daughters — and possibly Ms. Stewart — to dump their shares before the FDA news made its way to the general public. But it’s hard to see who would have been harmed if Dr. Waksal had been free to tell everyone he knew to dump their stock. The main effect would be to make the price of the stock more closely resemble its value. If the stock price were driven down, investors who bought then, before ImClone publicly disclosed the bad news, would have lost less money. Some might not have bought in at all, and others might have been alerted to sell earlier. If Dr. Waksal’s family and friends lost less money on ImClone, the better for them. Other investors in the company might not have benefited to the same extent, but they could have had more warning before the bottom dropped out.

If it hadn’t been for the laws, Dr. Waksal could have sold his own stock rather than whispering to his friends and family. Such sales by insiders are publicly disclosed, and would have made for a more accurate disclosure of Dr. Waksal’s view of his company’s future than any heavily lawyered press release or Securities and Exchange Commission disclosure form would. It’s hard to see why investors or shareholders would prefer the press release or SEC disclosure form to news of the sale itself, though it’s easy to see why the law-writing lawyers and SEC officials would (more work for them).

Insider trading enforcement is based on the false notion that such trading is a limited phenomenon. On the contrary, the market runs on insider information. According to Henry Manne, whose authoritative book “Insider Trading and the Stock Market” was published in 1966, changes in stock prices routinely precede public announcements of price-moving events. This happened with both Enron and WorldCom — though not to an extent that helped most investors much. Mr. Manne argues that such leakage of information is a good thing. When insiders trade on their information they make the market more efficient, an efficient market being one in which prices immediately adjust to underlying realities. In an efficient market, outsiders are less likely to get sandbagged by developments that have yet to be factored into a stock’s price. “People are relying on accounting, but accounting isn’t that accurate,” he said. “Insider trading is.”