Wow, do you really think that free markets and socialism are mutually exclusive? Because they aren't... Capitalism plays against the concept of a free market with it's tenancy to monopolise, as well.
I'm assuming you mean that some form of socialist policy can fit in with a free market economy, which is of course true (and indeed some would regard my favoured taxation system as socialist, due to the guaranteed income aspect), as opposed to a more classical definition of socialism where the state owns all the businesses.
The problem with most socialist policies is that although they are well meaning, they cause other problems. The NHS, for example, is a wonderful idea, but the structural inefficiency inherent in it makes it poor value, as well as creating a situation where better than mediocre healthcare is horrendously expensive. Likewise the welfare state, while fundamentally a good idea, is poorly excecuted and succeeds mainly in trapping people within it (although there is a school of thought that says this is intentional as a means of capturing votes).
The only two kinds of people that believe that socialism is obsolete are either idiots, or naive. Capitalism is far, far from pushing itself beyond the reach of the socialist critique. If you wish to show that socialism is obsolete, then that's the task that must be undertaken, and I don't think it can be.
True socialism is obsolete, it doesn't work. If you want to redefine socialism to mean something else, along the lines of a larger state support network, then it isn't, but the current approaches being taken are wrong, and moving more towards classical socialism won't fix that. State controlled, force funded industry and services are destined to fail, because they are structurally geared towards poor performance and inefficent spending. What's worse is that the longer the problems go without being addressed, the more damage correcting the mistakes causes (see mining in the UK for an example).
Edit: Gah, only saw your edit after I'd replied, I have the same problem.