Can someone please give me a proper definition for the term?
What I know so far is that it is an input box that allows the user to enter any data to categorize something. Is that it?
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Free tagging (at least how I use it) is when you expose a field that lets a user add any tag to the content node. Essentially you are allowing anyone with permission to add a custom tag to describe the content as they relate to it.
This is opposed to creating a rigid hierarchy of categories.
The most common application of free tagging is to let your users describe the content and then create “tag clouds” out of the results.