Origin of the word:
In medieval times, when warlords needed extra power for their armies, special mercenaries could be called upon. These mercenaries - called free lance warriors - would receive payment in gold, or in ground property rights when a certain area was conquered.
Freelancers today:
The more common (at least nowadays) definition of freelance is in the use of “freelancer”, referring to a temporary worker – temporary in the sense of ad hoc: When the job is over, the freelancer is again free.
The word freelancer, despite not being limited to media business, is often used in this context – freelance journalists, photographers, writers, editors, subeditors, technical crew etc. Freelancers are also used in many other writing-based businesses: Programmers, coders, perl-ninjas, SQL gurus, etc. Although I have never heard of a freelance lumberjack or traffic warden, I suppose most jobs could function using altered freelancing models. Usually, however, these will be called "temps" or "reserves".
Types of freelance
Traditional freelancing: (1a) This type of freelance work is the classical freelance model: The journalist writes a piece, submits it to a newspaper, and gets published (or not), and the journalist gets a nice fat pay check. These types of freelance stories are usually very well paid, but working as a freelancer fulltime, following the traditional freelance model, can be very insecure. (1b) Variations of this include calling up the newspaper, asking if they would be interested in the piece before actually writing it. This usually only happens if the newspaper knows the freelancer already, and a certain trust has been developed between the parties. Worst case scenario: that the newspaper will take the story and run with it, leaving the freelancer with nothing.
Outsourcing: (2) This type of freelance work occurs when a newspaper (or any other business) decides they need something specific. The newspaper calls up a contact they have, and will instruct this contact (a journalist or photographer, for example) about what they need. The contact decides if they have time and resources to do the job, and deliver the material to the newspaper. Similar to the 1b variation above, but the newspaper takes initiative to the story
Permanent freelancers: (3) This is a bit of an oxymoron, but this type of freelancers are being used more and more in the newspaper industry, in particular for photographers. The permanent freelancers will work for a business full-time, just like a regular employee, but at a higher pay. The advantages for the newspaper include that they have a lot less responsibility for the employee: They can decide on a Monday to not use the freelancer anymore, and on a Tuesday, the freelancer is without a job. The employer also has less social responsibility (think dental plans etc) for an employee. The specifics of this vary from country to country, depending on the country’s laws.
Advantages of freelancing
For the employer: Freelancers are always available, and add valuable expertise into certain fields. A newspaper might for example hardly ever do stories on cars, but when they do, it makes sense to hire an expert to write up the story, rather than to set one of their own staff on the case.
For the employee: It is hard work marketing your articles, maintaining contact with the newspapers and writing the articles at the same time, but it can be very rewarding – both as a work challenge and economically.
Disadvantages of freelancing:
For the employer: None, really – if the employers don’t want to use freelancers, they don’t. The main disadvantage is freelancers who don’t hold their promises, but the solution is fairly simple: Don’t use them again.
For the employee: Significantly worse socially (no permanent co-workers etc), fewer bonuses and benefits, and definitely a whole lot less predictable, stable and secure than a regular full time job. (but that can be a good thing, too)