I said that intellectual-property-respecting societies can have both "free" software and proprietary software, while those that don't respect intellectual property can only use the free (or "trade secret"/Omerta) model.

In a society employing both mechanisms, the free/open model must compete against the closed/proprietary model. The latter has better prospects of reward, so it seems probable that this results in much less free/open software being produced than would otherwise be the case, since capital is diverted to the pursuit which has the strongest reward possibilities.

They (the IP-non-respecting society) would certainly come up with a Microsoft Word-equivalent, but do so later and with less refinement on difficult features. As time has value, the later arrival of word processing software comes at a cost.

The question that follows is whether the cost of not being able to use the software without paying for it (and other costs such as the security holes and asymmetry of information caused by lack of access to source code) outweighs the cost of having to wait longer for the end-user-optimal tool to be produced.

Personally I am more concerned about the entrenchment of bad (e.g. restrictively licensed or poorly designed) technology than slowness of the addition of new features.

The basic problem is that the fact that something is proprietary and closed source means that its net value to the society is lower (due to providing a route to entrenchment of bad technology, restrictions on redistribution, etc.), despite the individual value to the customer (the end-user experience, available features, etc.) being approximately the same or better.

No, it doesn't, for much the same reason that exclusively-communal production methods are suboptimal: non-monetary mechanisms can motivate some kinds of production but not others, while "private property" societies still provide a meta-context in which communal production models can be used.

Exclusive use of free software does not entirely exclude the use of monetary incentives; as I have said, one can donate money to the creation of free software. You may be confused by the use of the term "free" which in english can refer to lack of restrictions or lack of monetary compensation. Software that is not protected by IP laws/norms can still trigger compensation, provided enough recipients are willing to cooperate.

Also note that providing support and customized upgrades for software is a successful business model for many companies who otherwise do not restrict the redistribution of their software.