While it's technically true that rules "limit" imagination...
It's a bit like saying that only free verse is truly imaginative poetry -- once you start writing sonnets or haiku or requiring the poem to scan or rhyme you've just killed all the imagination.
Or like saying that using paint limits the imagination of the painter.
There's nothing wrong with free form rpging or collaborative storytelling -- but if it's something you're doing with other people, there are going to be "rules" even if you aren't quite so explicit about them. There's *something* another player/writer could do that you would consider to have "broken" the story/game and you'd be mad at them. And the other players/writers probably know what they are.
Extreme Example: Five of you are sitting around playing a freeform game, telling each other your parts of the bigger narrative. One player, on his turn, gets up, goes to the fridge, grabs a beer, then goes to the PS3 and starts playing Call of Duty. You cry, "WTF, man? I thought we were playing <Freeform RPG>?" He replies, "I am. This is my turn -- what, is this against your precious rules? WTF? You're squashing my imagination here with your fascist rules!" Free form can work well for good writers, actors, and storytellers. Not so good for performance artists. End-Extreme-Example.
Whether the D&D rules are good for collectively telling a good story? That's another issue. There's still a lot of miniature-based tactical wargaming in the rule set. Personally, I'm starting to gravitate towards Fate systems, since the Dresden Files RPG came out.