A division of labor also assumes that the workers will produce an excess of goods--more than they can use. How does this excess production relate to free markets?
Excess production makes free markets possible. If there were no excess production, there would be no market.
In a situation where people only make what they themselves need, there is no exchange. People are producing at a bare subsistence level. If you only produced such things as you need for yourself, you would not have anything left over to trade with anyone else. This would mean that you would need to be a farmer or a hunter-gatherer. You would have to make everything that you needed. Even if you wanted something that you could not make yourself, you couldn’t get it because you would have nothing to trade for it.
Thus, excess production is absolutely essentially for the existence of free markets. They cannot exist without excess production.