Closed source until a few years ago has been an integral part of commercial software development. It means that the customer will only get a binary version of the computer program they licensed and no copy of the program's source code, rendering modifications to the software practically impossible from the technical side, because the usual way to modify a program is to edit its source code and then compile it.
The source code in this development model is regarded a trade secret of the company, so parties that may get source code access, such as colleges, have to sign NDAss in advance.
In the 1970s, the operating system UNIX, which was available freely and with complete source code, became common in university computing centers. Users made enhancements to the operating system and applications and distributed them among themselves without restrictions.
People like Richard Stallman were used to the openness of this hacker culture, and thus it came as an unpleasant surprise when more and more skilled programmers left academia to found their own companies and market their software, no longer giving their peers source code access.
Richard Stallman saw closed source as a step backwards in terms of user freedom and founded the GNU project in the mid 1980s, whose GPL-licensed software may never again be released without source code availability.
Closed source still dominates commercial software development, but in the last few years through the success of open source projects like Linux, KDE, and Apache corporate thinking has undergone a transformation.
Today, some corporations have recognized that closed and open source projects can complement each other, as is evidenced for instance by Sun Microsystems' move to develop their office suite, StarOffice, in parallel with its open source incarnation, OpenOffice.org. This is seen as a gain for corporate image and may be a good way to attract new talent.