Inaccurate analogy. The baker played no part in making it rain bread. Software developers and other producers of content invest their time, money, and life into creating the product that gets disseminated. If they see that the product of their labor will get pirated, they will be less inclined to innovate and produce more in the future.
"Price is dictated by supply and demand, and there's now a supply which is infinite and therefore, by traditional economics, surely it should be free?"
No. You are committing the fallacy of confusing descriptive economics with normative economics. Saying what will be is not the same as saying what should be. As an example: if I hack into your server, steal your startup's source code, and release it on BitTorrent, your startup's product will become free. That doesn't mean it should be free.
A better example would be a company that invested a huge amount of money into creating the perfect strain of corn that allowed farmers to get 10 times as much corn per acre, solving the shortage caused by ethanol production. They sold this corn to a few farmers, who then grew a lot of it and gave it away for free to others. The original company never recouped their investment, ran out of money since no one would invest, and shut its doors in the middle of inventing a new kind of wheat that would also solve world hunger.
The other farmers never would pay for the better corn, they already had corn, why pay for the better kind if they could get it for free? Right?
Wrong, the better corn would have eventually forced the other farmers into buying it to be competitive, and the company could have recouped its investment and created better wheat, better apples, etc. Just because something doesn't have a variable cost, doesn't mean it didn't have a fixed cost to start with.
EXACTLY what someone with an ethical dilemma says.
Situational logic if there ever was any.
Piracy does not take money away from sellers. It reduces how much they get. This is not the same thing.
The best example I heard was this: say you're a baker and you sell bread. One day it starts raining bread, and people pick up their bread from the street rather than pay for yours. It sucks for you that you aren't getting money from your bread, but how can you blame people for what they're doing?
Price is dictated by supply and demand, and there's now a supply which is infinite and therefore, by traditional economics, surely it should be free?
I don't agree that you should be able to get stuff from artists etc for free. I make a point of paying for the albums I download if I like them, and I pay for movies and TV I like. But it's not a question of ethics, it's a question of what exactly it is you're paying or not paying for.
Why exactly do so many newspapers publish content for free? Surely it's the same idea - they're publishers after all…?