What is the relation between the fantastic and the realistic? To what extent and in what way is reality, the reality of everyday life, represented in fantasy or myth? And what is the meaning and the effect of the kind of connections to history and geography that Tolkien has provided in the creation of his world? The crucial point, it seems to me, is whether fantasy worlds work in the same way ours works, or whether they have their own internal logic which is fundamentally different from our own. The representation of reality is not simply the accurate description of a series of events; rather, to some extent, it is the representation of the way in which a person views the world. The question of representation of reality is a question of the internal logic of the world, and of the style in which it is constructed and represented.
Tolkien's work is mimetic partly in its particular features; a continuity exists between Middle-Earth and things of our known world. Middle-Earth is clearly European in its general geography, although no clear one-to-one correspondence between Europe and Middle-Earth can be found. I think this lack of exactness comes from the same place as Tolkien's disavowal of allegory: Middle-Earth is not meant to stand in exactly for our world. In the same way that the people or races or events of the Lord of the Rings do not have a specific meaning, are not meant to be equivalent to contemporary events. They have their own internal consistency and logic. Again, Middle-Earth is an imaginary time in a historical world; it is not an imaginary re-casting of events in our world, anymore than it is pure imagination. Middle-Earth is earth but not. Middle-Earth can be thought of as an imaginary past, which is connected to our world and not different in kind from it.
There is another sense, however, in which Middle-Earth represents reality, and resembles the world with which we are familiar. The internal logic of Middle-Earth is the same as that of our world; it is our world. With the exception of mythic features, the world of Middle-Earth behaves in a way consonant with our understanding of reality. In particular, the nature of the inhabitants of Middle-Earth is what we would expect of people from our world. Men are men in Middle-Earth; they behave in ways appropriate to men. The difference between a Rider of Rohan and a stockbroker is not something fundamental in their nature; it is in some sense cultural, a result of the massive difference in customs and mores between the two societies. This is even more true of Hobbits than it is of men – Hobbits often seem to be broad caricatures of 'country Englishmen' at the worst of times, and have real emotional depth in certain other cases. The Hobbits (translated to human) and the men who live on Middle-Earth could live in our world; they are not alien to it and obey its laws.
This is the significance, I think, of Tolkien's claims about the historicity of Middle-Earth. The places and events of the Lord of the Rings are things that could have happened; they are not entirely alien to our world. Tolkien represents reality in his stories to the extent that he does to drive home this fact, that this world could be our own and that its inhabitants are not essentially different from those we see every day. The difference (along with many criticisms) stems from the mythical quality of the work. Events are stylized, abstracted from reality. People talk as people talk in myths; events happen which occur in myths and tales. The stories, though real, are also mythical, and bear the same relation to reality which myth does. Criticism springs most frequently from the confusing effects of this mixture, and a failure to understand what Tolkien is doing with myth and reality.
I think the reason Tolkien combines folklore and reality in the way that he does stems from his religious views, and the broader implications of his work. If his work is to have meaning in the way that he wants it to, if it is to have relevance not as allegory but in some other sense, it must be related to the real world. The Lord of the Rings is not allegory; its meaning is not symbolic or determined by the author, but springs from the events of the story and the actions of the characters. Tolkien wants the choices made by the characters of his stories to matter; for this to be true, they must be men like the men we know, and most importantly must have free will. Tolkien's theological commitments necessitate the linking of Middle-Earth to our world because otherwise it will not be comprehensible. Mimesis, in the sense of the realistic features of Middle-Earth and its coherence with our world, is tremendously important to
In closing, I am reminded in thinking about myth and reality of a poem by GK Chesterton (another Catholic fantasist) on the subject of myth, The Myth of Arthur. “Say, have you thought what manner of man it is / Of who men say 'He could strike giants down?'”