I've also heard the distinction made between "high fantasy" and "low fantasy." High fantasy is Sterling's #3 category in that it takes place entirely in an imaginary world like Lord of the Rings. Low fantasy takes place in, or uses elements from, our own world. Harry Potter would be another example of low fantasy.
Another category is "science fantasy." This is literature that takes the typical story elements of fantasy but presents it as hypothetically possible. Most of Edgar Rice Burroughs's fiction would fall in this category, as would Gene Wolfe's Book of the New Sun (which is high on my to-read list).
My own definition of magical realism would differ considerably from Gene Wolfe's. I would say that it is set entirely in our own world but that elements of magic or fantasy are used in a metaphorical sense for purposes of poetic expression. Or, to put it another way, events immediately acquire a mythic status with the fanciful and imaginative embellishments that would normally accrue over generations of telling and re-telling.
Since magical realism isn't really creating a different world (like Middle Earth), there are no rules for it to follow or break. What I didn't like about The Bone People--and this may have been what you were getting to when your patient arrived, Sterling--was that the whole atmosphere of the novel is such that the sudden introduction of magical elements seems completely out of place, and invalidates much of what might have been drawn from the story. Imagine that in the last 50 pages of Raymond Chandler's Farewell, My Lovely a mysterious cloud appears over Los Angeles, the murder victims all come back to life, everybody forgives everybody else, and they all have a big party. That's how I felt about the ending of The Bone People. But obviously others saw it differently, since it won a Booker Prize and other recognition.
: Gene Wolfe has been quoted as saying. "Magic
: realism is fantasy written by Latin Americans."
: Steven's objection to the intrusion of fantasy into
: the gritty realism of The Bone People has me
: Fantasy, real fantasy, can be broken into three
: categories: (1) A story in which a person from our
: world enters a magic realm; (2) A story in which a
: person, being, or powers from a magic realm enters our
: world; (3) A story that takes place entirely in a
: magical world.
: A good example of the first is Alice in Wonderland .
: Almost any ghost story is an example of the second.
: The Lord of the Rings is a celebrated example of the
: Magic realism, in my opinion, straddles a delicate
: boundary between the second and third. Macondo is
: obviously in Colombia, but it is also somehow a
: magical place. On the other hand, Winter's Tale by
: Mark Helprin stumbles, in my opinion, by being too
: specifically set in New York City around the turn of
: the century.
: Ordinarily fantasy must follow the rules that are set
: by the author. We know what hobbits are like.
: Tolkien does not betray our trust. We know we're not
: in the real world from the opening sentences. Steven
: felt that the author had broken faith with him in The
: Bone People because magic was introduced late without
: (My patient has arrived. Perhaps I'll write more
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