How can a folkie make a living?

1. Set up a limited company. Make sure your limited company has a fairly broad description of its remit: "multimedia and entertainment content creation" or the like. Keep all your receipts. In one fell swoop everything that was previously money down the drain (guitars, strings, travel, petrol, rail tickets, manufacturing CDs, studio hire etc etc) becomes a legitimate expense. It also encourages you to "think professional"

2. Put out an album that you have recorded properly and mastered professionally. Press up 1000 copies (at least) and send the majority of them to reviewers, festival organisers, writers, folk clubs, websites, radio stations, internet radio stations, venues.
Make sure the reviewers you send them to aren't just 'folk' media but national newspapers and magazines too. Never be afraid to give CDs away - that's promotion and an expense. Your postage costs are an expense.

That's a good way to start. At the very least it'll give you an idea as to whether anybody gives a toss about what you're doing.