[eru]

> (in practice what happens is someone else unknowingly gives you a stock for free and then you sell it, and they get an IOU for a share of the stock later; but let's not worry too much about the mechanics)

That's a mis-characterisation. What makes you think the counterparty lends you the stock unknowingly?

> The reason shorting is permitted is because [...]

You forgot the most important reasons:

First, why forbid voluntary transactions between people? Stock lending is an activity between consenting adults.

Second, short selling is a way to finance muckracking and investigations. Short sellers are the only people with an incentive to burst manias. They are an important mechanism for the market to regulate itself.