I'll see your Chambers and raise you the OED, which defines the noun as

people indefinitely

but also, in an obsolete usage last recorded in 1886, as

An aggregation of people in relation to a superior, e.g. God, a king or priest; the great mass as opposed to an individual

It also says that the word is found

in numerous modern combinations (formed after German precedent) with the sense

'of, pertaining to, current or existing among, the people; traditional, of the common (local) people, especially as opposed to sophisticated, cosmopolitan'

So folk music is music whose distinguishing feature is that it's "current or existing among the people" - and "the people" are implicitly defined as all those persons who aren't kings or priests.

Now we just need to define 'existing'...