But everyone calls it "felting" anyway, even though we know it's wrong.
At the microscopic level, each fiber of yarn is covered with scales. Usually these scales lie reasonably flat. But if you can coax them into standing upright, they will interlock with each other like Velcro. And that's what the process of felting basically is: a matter of getting all of the yarn fibers to interlock, forming one cohesive swath of fabric.
(This is why many white yarns don't felt: the process of bleaching them white also strips away the scales. If you want to felt white yarn, ask a yarn shop employee for help. I have had success with felting Lion Brand Fisherman's Wool in "natural.")
The basic recipe for felting is: heat, agitation, water, and detergent. This is why running it through the laundry works so well. Your laundry machine probably provides all four of those things in abundance. Unless it is one of the super-awesome front-loading machines which are gentle on clothing, in which case you'll have to literally take matters into your own hands.
But first, let me take a step back and mention something: the looser you knit, the better your item will felt. This is counter-intuitive, because it seems like the firmer the knit fabric is, the closer you are to felt already! But loose knitting allows for more agitation and movement between the fibers. When you're knitting something to felt, you'll want to go up at least two needle sizes from what you would usually use.
Now let's say you're ready to felt! You can throw your item in the washing machine, but you might still need to correct some of the felting by hand. A great way to hand-felt a large item, or many small items, is to put them in a bucket with hot water and a generous splash of liquid dishwashing detergent. Now you just need to provide the agitation.
If you can stand it, a great way is to pick up each item individually and chafe it vigorously in your hands. Rub your hands back and forth like you're trying to start a fire the Boy Scout way. It shouldn't take very long to get some good felting action!
If you have a CLEAN plunger, this is also a great agitator. (Plungers can be purchased for only a few dollars at the drug store. Please buy a new one, instead of using the one you already own.)
Once you have gotten your item nice and felt-y, be sure to shape it before you set it out to dry. Crumpled paper is a great way to shape hats, purses, boxes, and so forth. Rolled-up towels work nicely, as well.