Since Gutenberg invented the printing press in the 1450s, printing multiple copies of a book has gotten cheaper and easier. Around 1800, the more efficient iron handpresses started to replace wooden printing presses, and today automated machine presses mass-produce books. Recently, the digitization of books has allowed for the invention of print-on-demand (POD) technologies, where books are printed as they are sold, as well as of electronic books or e-books read on e-book readers, computers, laptops, smart phones and other devices.
In traditional publishing, the publisher takes all of the financial risk of printing and advertising the book. He also handles distribution, and has a pre-existing distribution arm or relationship with a distributing company, reaching regional, national or international audiences.
In self-publishing, no gatekeeper delays your project; you don't have to satisfy the taste of an agent or editor. If you have the money required to produce the book, you can publish quickly. Self-publishing also provides complete control over the finished product.
Traditional publishers expect you to help promote your book by doing book signings and interviews, promoting yourself online and possibly going on a book tour. They send out review copies to book reviewers. They employ book representatives who get books into bookstores. They ensure that online bookstores and their own website list your title. They sometimes take out print advertising on your behalf.
If you self-publish your book, you must do all of the promotions yourself, and it is harder to get reviews and interviews.
Many consumers assume self-published books are poorly written, seeing self-publishing as a last resort for authors who can't sell their book to a traditional publisher. However, there's a proud tradition of self-published poetry, e.g. Whitman's first edition of "Leaves of Grass." Many modern poets produce their own chapbooks without encountering any stigma from their community. Likewise, the audience for specialized non-fiction (e.g. local histories) doesn't care about literary worth as long as books have the information they want.
With the rise of print-on-demand technology and the Internet, vanity publishers frequently masquerade as self-publishing companies. Self-publishing companies charge to print your book, and possibly to provide an online storefront for your project, and that's it--they don't pretend to like or even read your book, and publishing with them is a straightforward business transaction. Vanity publishers charge inflated prices for extras, over and above the cost of printing, ostensibly for editing, promotion or other services.