[Child of the 7th Age]

I wanted to add two brief caveats to this thread: one regarding Hobbit parochialism and the other Hobbit population.

Several writers (including myself!) have commented on the Shire's parochialism, the Hobbit's tendency to look within their own community, to enjoy prosperity and to ignore what was happening outside. The Prologue stresses the peace and prosperity of the Shire before the War of the Ring, yet this was a relatively recent development. As late as 2911, the Shire faced a serious problem with famine, wolf attacks, and frigid weather, an event suggesting that true complacency and prosperity only occurred about 100 years prior to the events of LotR. (Interestingly, Tolkien refers in his prologue to a "long" period of Shire prosperity going back to the Long Winter of 2758, and doesn't mention the major problems of the Fell Winter in 2911 that do appear in his appendix.)

In any case, it's clear the Hobbits hadn't always had the "luxury" of being able to shut out the world. Between 1050 TA and 2340 TA, there were four separate Hobbit migrations, when significant segments of the community packed up everything and moved to find a new home. The prologue and/or appendix mention the Great Plague of 1636, the wars of 1974-75, the Long Winter of 2758, and the Fell Winter of 2911 as other events originating from outside that disturbed the peace of the Shire. The Fell Winter was no easy thing: the Hobbits dealt with famine, wolf attacks, and bitter cold. It is likely that the Rangers helped them turn back the wolves. Bilbo would have been just 21 years old. (What a great RPG that would be!)

So it was only in the past 100 years that the Hobbits forgot about the Rangers and became a sheltered, complacent and parochial people, something of which Gandalf disapproved. The istar's wonderful words in UT say it all about parochialism and hint at an earlier time when this was not the case:

They had begun to forget: forget their own beginnings and legends, forget what little they had known about the greatness of the world. It was not yet gone, but it was getting buried: the memory of the high and perilous.

As far as population goes, my impression is that the Shire was not overcrowded. Fonstad's map in the Middle-earth Atlas shows only a middling density in the middle of the Shire, with sparse population in the outlying area. More importantly, if you look at the historical pattern since settlement in the Shire, you can see that every 300 years or so, something happened that cut down on the population. Look at this pattern, which is reflected in both the prologue and the appendix: 1636 plague; 1974-75 war; blizzard and famine 2758; further blizzard, famine and the attack of wolves, 2911. Michael Martinez has a good essay on this called "Charting the Shire Lines". Click here.