Very interesting point. I think free is good when it comes to code, apps, etc... things that can be copied and distributed. It creates a good shared base of stuff on which to build.
But when it comes to services, totally free can sometimes be bad. That's because there's no such thing as a service that's free to run, so the money has to come from somewhere. Either the service is being monetized through some backdoor method -- usually something involving privacy intrusion or data mining -- or it's what economists call "dumping."
Dumping is when you flood a market with free or below-cost goods to kill competitors, and then jack up the price or even kill the market when the competitors are gone. The best example in software is Internet Explorer, which (prematurely) killed the market for browsers and led to the horrible age of total IE dominance of the web.
Google Reader may well have been -- whether intentionally or not -- dumping. If it was intentional, it might be an effort to kill RSS entirely. The big players -- Google, Facebook, etc. (are there more?) -- all have a vested interest in killing independent less centralized ways of aggregating knowledge in order to steer all traffic to them.
I still use a Mac reader called NewsFire. It hasn't been updated in a long time though. I don't even remember if I paid for it, but if it's free I would certainly be willing to pay. Maybe the authors of such apps can capitalize on this.