As you know, postmodernism sees "art" in very open, flexible, and fluid terms: it is very self-conscious (metafiction), a mix of several styles and media, even if means art as a blatant rip-off of another work (parody). Most notably there is an element of globalization and mass (mass media, mass communication, mass consumption, etc...).
Lost in the Funhouse, like other metafiction short story collections like The Things They Carried, uses embedded narrators, frame stories, shifts in chronology, and multiple personas. Barth has admitted that his style is meant to...
‘‘shaking up bourgeois notions of linearity and connectivity and ordinary, realistic description of character, ordinary psychological cause and effect.’’
in order to...
‘‘begin with the assumption that art is an artifice, that it has an element of artifice in it. And so far as wanting our reader to forget that they are reading a novel, we are more inclined . . . to remind them from time to time that this is a story, not that this is only a story, but whatever else it is, it is a story. You’re enthralled, you’re spellbound, if we are doing our work right, by a storyteller, and do not confuse this with reality. Art ain’t life.’’
So, Barth uses a nesting of stories, each parodying the others, even parodying mythological stories (like Proteus), all in an attempt to break down the fourth wall between the speaker and audience. His recursive style echoes all other stories as it echoes its own and, therefore, becomes connected by its own disconnectedness.