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As you know, one definition of irony is the use words to truly mean their exact opposite. That's what's going on here in Swift's use of the word modest. Although he says that his proposal is modest (meaning not anything terribly special or different) it really is very outrageous.
After all, what Swift is saying is that Irish people should start selling their children to be used as food. That is about as far from modest as you can get. So, by calling it a modest proposal, he is being ironic -- trying to act like he thinks he's being reasonable when he knows he isn't.
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