This section deals with the legal details of distributing software, and the so-called licences that dictate what can be done with them.
Software out of being a sequence of bits, that can be transcribed to a paper, spoken or otherwise transported is considered speech and so is protected by the Freedom of Speech principle of Liberalism. Thus, writing software and distributing it are a constitutional right in most liberal countries.
Nevertheless, a piece of software, as any other text, can be copyrighted. Copyright involves making sure that the software as given to someone else other than its originator or copyright holder will be restricted in use or modification. An originator can outline what he believes to be a proper use of the software in a code licence (which applies to the code) or an "End-User License Agreement" (or EULA which applies to given binaries).
Proprietary software, i.e: such whose use, modification or distribution is encumbered, was a relatively new phenomenon if you take a look at the old history of computing. It actually started even before the time when Microsoft, then a very small company wrote Altair Basic, and Bill Gates published the famous (or possibly infamous) "Open Letter to Altair Hobbyists". In fact, IBM and other companies distributed proprietary software for mainframe systems, a long time before the Personal Computer revolution.
The PC revolution, however, made the situation more critical. Soon, computers became faster, more powerful, with larger memory, and more common as time went by. At the moment, there are 100's of millions of Pentiums and other computers out there, and millions of newer computers are sold each year.
Yet, the majority of these computers mostly run software that cannot be modified or distributed, at least not effectively or legally. The free software (or open-source) movement started as an anti-thesis to the tendency of vendors to hide the details of their software from the public. The Linux Operating System with its various components (most of which are available to other systems as well, and are not affiliated with the Linux kernel in particular) is the most visible showcase to this phenomena. By installing Linux it is possible to turn an everyday personal computer into a full fledged UNIX-based workstation or server, which is a 100% powerful GNU system. This can cost little if any money, and the various components of the operating system are all freely modifiable and can be re-distributed in their modified form.
It is not the only place where free software can be used. It is in fact possible to turn a Windows installation into a Linux-like GNU system as well (see Cygwin for instance).