Interestingly, you say that we can't just say that it should be free and have it be that way, and you're right. WE didn't say that, and that is not what is happening.
What is happening is much the same thing as what would happen to Gold if it were suddenly as abundant as Hydrogen, the only value that Gold has is tied to it's scarcity, if the market is flooded with Gold, there is no value.
This is what is happening to Copyright, it used to be that distribution and production made things of a Copyrightable nature scarce (Maybe not scarce per se, but certainly limited.) The internet has made it so that this is not the case, nearly anyone can produce for next to nothing and distribution CAN be had for so ridiculously close to nothing that it's practically indistinguishable. The value has evaporated, the people that are willing to pay for such things will get fewer and fewer as the obstacles become smaller and smaller, and the value gets less and less.
The day may soon be upon us that the hypothetical artist you refer to as only making albums, will have so little general value as to be only capable of generating income from devoted fans that bestow value on the works and know he can only produce if they are willing to pay. To go back to your point about composers working on commission "back in the day", this will once again become the model, only the people commissioning the works will be the patrons themselves through their donations/purchases rather than a rich aristocrat.
Finally a point that you haven't touched on, if we suddenly came upon a replication technology that allowed us to cheaply and easily reproduce anything and everything (Much like the internet has done with media) should we start making laws to control what people can and can't make with their own replicators? In the name of GM making a buck should it be against the law to replicate a '69 Camaro Z28, even when it costs them nothing for me to do so, conversely I had to expend my own energies, time and presumably money making the duplicate? If so, why?