Tolkien clearly thought that Men had the capacity for both good and evil, and I think that he was closer to the second view, that too much government corrupts people rather than helps them. For example, Morgoth and Sauron had complete dominion over their subjects and so corrupted them. He also evidently believed that power corrupts people (as in Morgoth and the Numenoreans). I think that the hobbits were products of strict social rules rather than actual laws, and yes this made them good people but also a little foolish, however it was the hobbits who didn't listen to these rules who were the heroes (Bilbo and Frodo).
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