Hmm, I'm going to have to add something about fiber qualities to the knitting FAQ.
Anyway, there's a huge thread about ethical dillemas and yarn choices
here. Long story short: only you can decide where the line lies, and every mass produced yarn has it's downside (animal fibers are from animals, plant fibers usually involve lots of pesticides, synthetics are petroleum products). I personally think your best bet to be an ethical yarn buyer is to think small producers. You can get
organic cotton yarn, or wool from small farms and/or local spinners (some small yarn producers even list the name of the sheep on the skein of yarn.
Here are some general thoughts about fibers:
Wool: really the ideal knitting fiber. It's got some natural resilience/bounce, it's warm, even when wet (wool can actually hold 30% of its weight in water without feeling wet), it blocks well, and it's feltable. Also, there are tons of choices (sheep breeds) to choose from for different qualities (hard wearing vs softness for example).(cons: comes from an animal, can be itchy, some people are allergic)
Other animal fibers have some or all of these qualities.
Plant fibers (cotton, linen, hemp, etc) tend to be very inelastic (so no bounce to the yarn, so cables don't show up well and ribbing won't be as stretchy), they can make great summer things, but are actually heavier than wool for the same volume. Tend to stretch out/get heavy when wet.
Synthetic fibers (acrylic, nylon, etc) can be spun to have any number of different properties in terms of weight and texture. Some are scratchy, some are soft. The really finely spun, soft fluffy ones, however, tend to get pilly after a while. And synthetics in general are subject to melting (if they get ironed or something on accident). They also don't insulate as well as wool. That said, you can get some really neat effects with synthetics. And a bit of synthetic added to wool adds stability and strength, so your piece won't wear out as fast . (Which is why sock yarn almost always has some nylon in it).
