It is not the responsibility of the free software movement, or for that matter of the government, to ensure the continued success of any particular business model.
The fact that free software does get produced refutes your assertion that in theory it shouldn't get produced. And it's not all done by volunteers, by the way; in fact, I'm not even sure it's mostly volunteers. I've made my living from free software for many years, as have many people I know. The economics of this are straightforward: there are organizations in whose interests it is to have the software maintained and developed, and they're willing to pay for that.
There are several studies of the "demographics and motivations" of free software developers. Did you try searching? (Perhaps using Google, whose servers run free software, thus providing an example of one company in whose interests it is to support certain free software projects -- which Google does, with donations of both money and developer time.)
"Small businesses and freelancers in the software business unfortunately have no such freedom and in proportion to the rise of the OSI movement, will start to go out of business, or to move to other arenas."
If by that you mean small business and freelancers who make their money from royalties (that is, by selling restrictively-licensed copies of their software), then yes, you're probably correct.
When the cash register was invented, thousands of skilled professionals gradually lost their jobs: humans who had learned to do quick arithmetic in their heads and made a good living as cashiers. I do not deny that this was upsetting for them, but are you suggesting that the invention of the automatic cash register was therefore somehow conceptually wrong?
Free software works. As a result, you may need to find a new business model. I wish you luck! Consider getting involved in a free software project; from a purely professional standpoint, that has worked very well for me and for other people I know.