If, say, Enron insiders could've shorted their own stock, that would have improved accuracy and thereby diverted more funding to more productive enterprises.
I guess there could be second-order effects when insiders can actually change the outcome, which is why athletes aren't allowed to bet on their own games.
You don't need to guess. That's exactly why it's illegal: It creates bad incentives, similarly to e.g. taking out a life insurance policy on a random person you have no financial dependence on.
May even have been referred to as Dead Peasants Insurance.
For example, if you happen to be a bartender or a waiter who accidentally overhears material non-public information, you're free to trade on that.
He didn't say that it doesn't. It obviously does make stock markets more accurate.
But it tends to drive down the total amount of money available to be invested in stocks, which is compatible with the claim that it makes the market worse at funding productive enterprises.
That seems like a big claim. For most market participants, there's always a counterparty that's so much more sophisticated that it doesn't make a difference if they're an insider or not.