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From the movie series, it seems obvious that the civilization of Elves, once great and important, is declining. Their numbers keep reducing and they retreat into some remote islands and in general "their time is over".

Elves do not appear to have any serious weak spots; they can be friendly and cooperative, they can be brave, they can love. If anything they look much more like an improved version of humans.

What is exactly the problem?

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"some remote islands", that's funny. They're going to Valinor, where the gods live! –  Michael Borgwardt Jul 6 at 14:23
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Well, the Valar are more like angels... but it's all the same from the human perspective (though elves know the difference) –  adam.r Jul 7 at 1:06
    
@MichaelBorgwardt, it's across the sea, then up into the heavens, maybe even on another planet. I'd say that's pretty remote. Though if you're saying Valinor isn't an island, I guess I could see where you're coming from. –  trysis Jul 7 at 1:48

2 Answers 2

up vote 24 down vote accepted

In short, the Elves don't breed fast enough and their woodland is being decimated by the encroachment of human farms and settlements.

They've been using advanced magic to arrest the decline of their civilisation, a decline that had been ongoing for millennia. They've even brought Middle-Earth to the brink of destruction by crafting magical rings in a vain attempt to block out the real world.

Galadriel (in LotR) makes it abundantly clear what they expect to happen if the One Ring is destroyed and their rings are de-powered :

"Yet if you succeed, then our power is diminished, and Lothlórienwill fade, and the tides of Time will sweep it away. We must depart into the West, or dwindle to a rustic folk of dell and cave, slowly to forget and to be forgotten."

Tolkien echoed this sentiment in a letter to a fan

They [the elves] wanted to have their cake and eat it: to live in the mortal historical Middle Earth because they had become fond of it … and so tried to stop its change and history, stop its growth, keep it as a pleasaunce.”

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Like the West and our technology. Tolkien was quite the prophet. The Dwarves delving too deep into Moria and awakening a Balrog was obviously a warning about fracking. –  Gaius Jul 6 at 10:34
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@Gaius - I personally read it as a warning again environmentalists trying to "freeze" the world into a verdant utopia that never really existed. –  Richard Jul 6 at 10:41
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This answer leaves out that the Elves are literally fading into mere spirits, and the power of the Three was in large part to prevent that. In fact the Three also allowed them to communicate with the Elves that had already faded. See: middle-earth.xenite.org/2011/09/22/… With the Three gone, most of the Elves had to leave or they would essentially die. –  Shamshiel Jul 6 at 15:00
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@Shamshiel - Galadriel's quote strongly suggests that there is a life for the Elves beyond the destruction of the One Ring but that they'll be mere oddities in a human-dominated world. –  Richard Jul 6 at 15:23
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And to be clear, not all the Elves did leave Middle-Earth - many chose to stay and fade. –  Shamshiel Jul 6 at 16:33

This was the fate of Arda, dating back to the original Music of the Ainur, as described in the Silmarillion:

And some have said that the vision ceased ere the fulfilment of the Dominion of Men and the fading of the Firstborn...

Aragorn's coronation in Lord of the Rings is precisely this moment - the Dominion of Men - and Gandalf even uses these exact words when describing it (in The Steward and the King, Book 6 Chapter 5):

This is your realm, and the heart of the greater realm that shall be. The Third Age of the world is ended, and the new age is begun; and it is your task to order its beginning and to preserve what may be preserved. For though much has been saved, much must now pass away; and the power of the Three Rings also is ended. And all the lands that you see, and those that lie round about them, shall be dwellings of Men. For the time comes of the Dominion of Men, and the Elder Kindred shall fade or depart.

The nature of the Elves is to fade, and Tolkien describes the reason for this in a passage entitled "Of Death and the Severance of Fea and Hroa" among the Finwe and Miriel materials, published in Morgoth's Ring:

As ages passed the dominance of their fear (i.e spirits) ever increased, 'consuming' their bodies. The end of this process is their 'fading'...

So, during the Lord of the Rings time period, we have the Elves starting to fade, and the Dominion of Men beginning, which were both foretold from the creation of the world, and also due to the nature of the Elves as-designed.

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The role of Elves is to begin works, whereas the role of Men is to take them up and complete them; I don't have an exact citation for this but will add it to the answer when I find it. This is an interesting parallel to what Tolkien says elsewhere about Melkor and Manwe. –  Darth Satan Jul 6 at 10:56
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The "fading-ness" of the elves is perhaps their oldest defining characteristic, going all the way back to the original Book of Lost Tales, if not before (I think Kortirion Among The Trees may predate Lost Tales, if only slightly). –  Matt Gutting Jul 6 at 14:35

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