[Child of the 7th Age]

Oh, but there is fiction.....it just happens to be fictional poetry. Annunfuiniel mentioned two examples at the end of her post. But, if you want more instances of this, look at The Adventures of Tom Bombadil. JRRT says these poems are "mainly concerned with legends and jests" from the late Third Age. There are several humorous poems about the Man in the Moon as well as others about stone trolls, the mewlips, and Fastitocalon, the giant turtle that resembles an island.

It does appear that residents of Middle-earth never developed the form of literature we would call a novel. But then neither did our own ancestors for a very long time. Remember that, historically, the novel is a relative newcomer. In the ancient and medieval world, folk listened to various sagas and epics and ballads which generally purported to be historical. The Norse legends, the Illiad, the Arthurian tales--Tolkien's residents of Middle-earth stand closer to tales like these than to the modern novel. This is undoubtedly one of the reasons that modern critics have trouble relating to his stories.

We are used to thinking of fiction strictly in terms of the novel or short story, but these are not the only way to express imaginative ideas. Hobbit rhymes, at least, incorporate fictional devices. Indeed, I would say these hobbit verse has gone beyond any pretense of myth over to the realm of faerie.

Annunfuiniel makes a good argument that there is a very thin line between historical fact, legend, and myth in Middle-earth. Part of it also depends on who is telling the story and who is listening to it. Elvish lore, serious historical accounts, are often transformed into fantastic, humorous jests when hobbits get hold of them! (The exception to this statement was, of course, Bilbo, but then he was an exceptional hobbit.) And again, historically, the line between history and imaginative tales was much less stark than today.

Actually, now that I think about it, this stark contrast may not be totally accurate. History, as written by us today, also contains doses of fiction. It's just that we don't call it that, since it's hard for us to recognize our own biases and fancies. Yet, we moderns wear a prism over our eyes when dealing with any age different than our own. Our own experieces color how we present and interpret the past. This creates a patina of fiction over any historical reality. Just how different is that than the legends of Middle-earth. Yes, the intent of the modern historian is different, but the end result may be closer than we'd like to admit.