[Rumil]

Hmmm, (Rumil unwisely dips toe into deep water),

I think some of the separation of races and nations in Middle Earth stems from the low population. There is more than enough space for communities to develop in isolation. Additionally, there is, if you like, a difference in ecological niche. The Rohirrim, while living close to Lothlorien would not consider a forest as a suitable place to live and raise their horses. Likewise the silvan elves wouldn't be interested in living at the Lonely Mountain.

As has been said, the lands 'in between' the settled areas were inhospitable and potentially dangerous. Rumours of Trolls would convince most to change their travel plans! An additional inducement to isolation could have been provided by the great plague of the previous millenium.

The 'isolationism' of the Gaffer illustrates a further point. In medieval times the vast majority of the population never strayed very far from their own parish, maybe as far as the local market town every once in a while. It would therefore be very unusual to meet somebody that you didn't know, a circumstance where trust in 'outsiders' would not be easy, perhaps.

From the point of view of an author, the lack of knowledge by the hobbits of the next place along the journey allows true wonder in the description of the place. If Elrond had told Frodo and co. (and therefore us readers) exactly what to expect in Lothlorien, the effect would surely have been destroyed. Therefore the isolation could be seen as a plot device.

As has also been said, the lack of contact between races makes the languages easier to sort out, which was Tolkien's great motivation. He does seem very sketchy on the 'economics' of Middle Earth, trade routes, agriculture, population sizes etc., undoubtedly because he wasn't very interested in this aspect.