I've always been fond of the (probably misattributed) quote from Woody Guthrie...
"Folk music is what the folks listen to"
I'm nowhere near qualified to joust with the likes of Sandy, Art, Joe, or probably just about any of you out there. I'm a barely scraping by musician, working office jobs in a vain attempt to get by until my "real job" finally starts to make money... We've had something of this same discussion (albiet through a 3-6 Guinness each haze), and we finally decided to drop the "folk" part of our description entirely.
It's just too broad of a category. The music we play varies from "western expansion", "irish drinking", "civil war battle", "music hall", and pretty much anything we enjoy up to and including a song from the Memphis Jug Band. We've learned these songs from many sources, some from books, some from recordings. Our set retains some of the influences we learn from, but we put it through the unique process of alteration that happens whenever a group of musicians tries to agree on arrangements for anything.
I'd like to think we remain true to the soul of the music. We may abuse our artistic license on occasion, but we enjoy the music we make, and the folk who watch and listen to our show seem to enjoy it as well.
I don't know if there's a point to this. Perhaps it's just that "folk" (to me) is too big of a tent to label people under. Perhaps it's not. I'd still like to think that "Folk" music is the music of the "folk", and changes and thrives because of that.
Adopt, adapt and improve...