Based on "The Hobbit," how might one describe or demonstrate the point or purpose of literature?
J.R.R. Tolkien's The Hobbit, along with The Lord of the Rings, is the quintessential fantasy story, as it introduced the world to a mythical realm of dwarves, elves, wizards, and dragons. However, the true strength of Tolkien's universe lies not its popularity with fantasy fans, but rather in its imaginative storytelling, complex themes, and rich metaphors. While I would not say that The Hobbit necessarily argues for any particular purpose for literature as a whole, I do think it demonstrates clear support for one very important literary device: The Hero's Journey.
In a nutshell, the Hero's Journey is an archetypal story that describes a character who travels out of innocence, overcomes obstacles, and returns a wiser, stronger individual. This journey can be either physical or metaphorical, but it can be seen in many great works of literature.
The Hobbit (and, to an even greater extent, The Lord of the Rings) is a classic example of the Hero's Journey. The protagonist, Bilbo Baggins, begins the story as a quiet, well-to-do member of his hobbit community, and is willfully ignorant (and a tad frightened) of the goings-on of the outside world. However, after being coerced into helping the Wizard Gandalf and a band of Dwarves into reclaiming a horde of gold, Bilbo is forced to overcome many obstacles, such as trolls, man-eating spiders, and, not least of all, fire-breathing dragons. Through this process, Bilbo discovers his inner courage. More importantly, he discovers that he has rather a lot of it. At the end of the tale, he returns home a stronger, wiser, happier (and, let's not forget, richer) hobbit.
So, if you're looking for The Hobbit's take on the purpose of literature, I think it's safe to say that it sets out to demonstrate the importance of essential mythologies such as the Hero's Journey. Tolkien's fairy tale for adults does quite a bit more than this, but to explain all of the literary value inherent in Middle Earth would require far more space than is allotted here.