Consciousness could well be a spandrel. That is to say, it may just be that when you have a sufficiently complex information processing system made of the particular kind of physical stuff our brains are composed of, the processes involved will have some kind of subjective character. If conscious mental activity just is brain activity, and not some kind of strange excretion from it, however, then they have precisely the same causal properties, and it’s just a confusion to describe it as “epiphenomenal.”...Or to put it another way: The alternative picture is that evolutionary selection pressure might have produced these very strategic zombies—like vastly more complex insects, say, all stimulus-response with nobody home— but then some mutation won out that added this further feature, consciousness, to the system, because it yielded some additional improvement.
The big question is, why do we think there's a self inside of us? I've been working my way through Jung, who said essentially that there are two things: an I and a self. Self is essentially a way of identifying the set of complexes (mental things or processes) that belong to us, and the I is the complex that sits in the middle of all of that. But, the I is just one of a large number of characters that live inside our head, and the self is a spongy mass that can pick up or discard other bits of the mental landscape as part of the process of individuation.
Another way of looking at the problem of consciousness is via the evolutionary paradigm. We have a consciousness because that's the best way for a complex informational system to accomplish the set of tasks (predation, social interaction, anticipation of future states, interrelation of sensory and volitional data) necessary to support an organism of such complexity. It might also be true that there are informational, as opposed to biological laws at play. We might have a conception of self because its really difficult to process information without having a dynamic internal model referring to onesself, in the same way that its really complicated to describe what's going on in one's day without using a personal pronoun.
In any case, what becomes apparent is that despite a large number of attempts to identify a seat for the soul in a localized part of the brain, we end up with nowhere to point. There are many pieces of the brain where part of the soul might rest, but as we cut finer and finer the parts slip between our fingers. This is an argument for emergent properties in the nervous system. That, or non-materialism.
Free will presents a similar paradox. Julian suggests it may be a required by-product of biological structure. However, it might a by-product of the informational structure of the universe; to the extent that the universe contains phenomena that are indeterminate and unpredictable both in the future and in the past (one cannot either predict the shape of the puddle from the shape of the ice cube, nor reconstruct the ice cube's shape from that of the puddle it made), and because predictable events can result in conscious entities' taking actions that preemtively cause the predictable event not to actually occur, free will must be possible.