'The Big Rock Candy Mountain' is one of many songs about mythical lands of plenty and comfort, a tradition that stretches back seven hundred years or more in Europe. Life really sucked back then for the vast majority of people, and the tiny minority of people who enjoyed a degree of material comfort generally spent their days blissfully exploiting the populace.
Out from this social divide between oppressor and oppressed sprung the legend of Cockaigne. Cockaigne was a place where monks beat abbots, kings had to step aside for peasants, nuns cavorted around in various states of undress, feasts grew on trees and there was no need to work. The inhabitants of Cockaigne spent their days lounging around, eating, drinking and getting laid.
The legend quickly spread throughout Europe. The Germans knew it as 'Schlaraffenland', the Swedes as 'Lubberland', the Dutch as 'Luilikkerland', and to the Spanish, Cockaigne was known as 'Cucaña'. A bunch of rowdy German monks in Benediktbeuren immortalized this place in the poem, 'Ego sum abbas cucaniensis', preserved in the Carmina Burana (check out its hit single, 'Fortuna Imperatrix Mundi'). Pieter Bruegel painted 'Land of Cockaigne' in 1567, depicting a bunch of guys laying around, fat and contented, around a tree whose branches hang laden with roasted geese and jugs of beer. But Cockaigne was not a utopia; at least in Thomas More's take on earthly paradises generally involved order and disciplined governance, well in keeping with the upbringing his social station afforded him, while Cockaigne was a land where conventional morality was suspended and authority held no sway.
The paradise depicted in the song 'The Big Rock Candy Mountain' was similar in practically every respect to Cockaigne: a mythical land without bosses or cops, where nothing was forbidden, where a person lacked for nothing, a paradise for the downtrodden. It was one big kegger, where everyone was real chill and there were no douchebags or cranky neighbors calling the police on you.
Afterword (April 16, 2009): I feel it's a tootin' disgrace that I neglected to mention the following: Ancientsnow's excellent write-up on the Guaraní legend of Yvymarae'ỹ (thanks to rootbeet277 for reminding me), as well as mention of Cockaigne in The Joys of Cooking as a term for those recipes particularly favored by the authors of said tome (as in 'rice pudding with raisins Cockaigne' --- thanks shaogo!)