We don't live in a totalitarian state, we're not slaves, and most of us are not so desperately poor that our power of choice has been effectively snuffed out, so we're free, right?
Michel Foucault says no. In his book, Discipline and Punish, he tells a story reminiscent in style of Nietzsche's Genealogy of Morals about how techniques of punishment in Europe quickly changed from public torture and execution in the 18th century to incarceration with an intent to reform by the early 19th. While the old method was brutal and clumsy, we shouldn't, he thinks, see the new method as solely a matter of government becoming more humane. The old ways weren't given up out of compassionate reform; they evolved because they had problems that made them unsustainable given changes in demographics and economics. The state did not simply give up its absolute power; instead, power became diffused, more subtle, and more effective. The strategy was no longer to intimidate the populace into behaving with a show of force against transgressors, but to preventively train us all to behave.
Foucault is fascinated with the mechanisms of power, and sees power relations as much more pervasive in our lives than you might think: pretty much, any time you're caused, motivated, or influenced into doing something, there's a power relation being expressed, so all of the institutions we interact with, all our friends, our professional associates: dealing with any of these means dealing with power issues, and even if we feel free, we might on further examination decide that the things exerting power on us are ones that we would much rather shake off.
The most famous chapter of the book concerns Jeremy Bentham's Panopticon, which is a model for a prison where all the inmates are easily visible from a central point, yet the observer can't be seen by them. So the inmates know they could be watched at any time, and so behave, yet it isn't necessary to actually watch them even most of the time. Bentham saw this as a useful model for improving organization and increasing productivity in businesses, schools, and other institutions, and Foucault argues that the influence of this idea was crucial in building our current society. Today's surveillance technology makes this even more relevant, and the fields of cubicles, rows of school desks, various virtual spaces (Facebook, for one) used to present us: all this would conform very well to Foucault's expectations. Read more about panopticism. This site has some nice panopticon pictures.