In terms of Tolkien's literary context, we should look to his twin focuses: philology (the study of languages) and philosophy (moral, rather than political ethics). The Hobbit is a literary exposition of Tolkien's personal grappling with the "big ideas" that have long engaged the great minds of Eastern and Western civilizations. Without straying into Tolkien "lore," we briefly note Tolkien's career as a Professor at Oxford, the site of Tolkien's well-documented and highly-intellectual relationship with the well-read Professor C.S. Lewis, a close friend and fellow author (think: Narnia). Tolkien's relationship with Lewis is significant because it helps to establish Tolkien's understanding of good and evil in the world, repeatedly represented through the old archetypal binaries: Light = good, white, God, truth, etc.; darkness = evil, black, devil, deception, etc. The Hobbit is a good preparation for a reading of the LOTR trilogy (or a reading of Lewis' 7-part Chronicles of Narnia) because Tolkien's traditional and Christian world-view has to become flexible enough to incorporate magic, benevolent wizards (biblical outlaws) and non-human thinkers. Here is an example of a potentially sticky question: if Bilbo has compassion, then within Middle Earth, does Bilbo have a soul? Lewis and Tolkien both explored issues of religious and moral philosophy in their literary works, texts that are, arguably, works of fantasy. And one thing to always keep in mind is that Tolkien created "Middle Earth" over a period of decades, and most of his works were published after his death?much like The Hobbit, originally published in 1937.
In considering other writers, C.S. Lewis' slim non-fictional volume, The Problem of Pain, is an interesting insight for readers who are looking to make a fuller context of works like Lewis' and Tolkien's. Chapter 5, "Riddles in the Dark," is not as rigorous as "The Grand Inquisitor," the oft-compared and highly dramatic scene of religious debate and moral philosophizing, presented as a chapter of Dostoevsky's "The Brothers Karamazov." Tolkien wants to recreate mythology and make these epics relevant to his contemporary society. His problem is a fact of history: the Greek myths, Norse epics and Anglo-Saxon sagas may be a safe and academic pursuit for philologists who enjoy studying ancient languages. But a 20th century Oxford Professor has to grapple with the essential paganism of these ancient writers, characters and themes. Tolkien does not have to be fearful of censorship, or the Spanish Inquisition, but Tolkien's quest?or one of them?is an attempt to write something old and magical that might re-affirm Tolkien's Christian understanding of good and evil. Tolkien wants to turn those old pagan Anglo-Saxon sagas into something that will edify and morally gird an increasingly slack, confused and frightened society.
As one reads more and more of The Hobbit and Lord Of The Rings trilogy, one finds the characters will diverge into good and evil groups, their individual magical powers become comparatively insignificant, the "conflict" emerges as a battle between One Good and One Evil, and the allusions and archetypes drift away from old pagan types and into Christian ones. As a final note on context and history's irony, cultural relevance is very much a part of what we consider old and new. For a philologist, a "dead language" may have arrived well after a language that is still spoken. Similarly, a student of philosophy and literature will probably realize that ?those old pagan Anglo-Saxon sagas' were written well after the time period attributed to the Biblical scriptures. And of course, those sagas and myths never lost their ability to strike moral chords and teach lessons without striking the wrong chords and ruffling religious feathers.