Why did Modernists use the omniscient narrator less often than their predecessors in world literature?

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Narrative style changed significantly after World War I, which is considered the peak of Modernism, particularly in literature.

Eighteenth- and nineteenth-century literature is very often characterized by the presence of a third-person omniscient narrator who knows the characters' thoughts and motivations, not unlike God hovering over the narrative. When characters spoke for themselves, the print would be italicized to mark the shift from the third-person to first-person perspective. This motif tells us that, before the postwar period, readers were, perhaps, not attuned to sudden shifts in perspective when reading prose. The italicized print let them know that a character was sharing his or her thoughts.

Due to the pervasive influence of psychoanalysis after the First World War, stream of consciousness became a common narrative tool. The works of Virginia Woolf, James Joyce (particularly Ulysses), and William Faulkner are marked by stream of consciousness. This narrative device allows the author to shift suddenly from a third-person voice (if that is what the author has employed) to a first-person voice, to slip from dialogue to inner monologue, or to shift from the mind of one character into that of another. 

Free-indirect discourse, another narrative device which emerged during the Modernist period, was influenced by stream of consciousness. Free-indirect discourse is a literary device which occurs in prose narratives written in the third-person omniscient voice. In the narrative, there is a sudden merging between the narrator’s voice, which is otherwise distant and observant, and that of the character who is speaking or having a thought. The narrator suddenly takes on the voice of the person or persons speaking, instituting their dialects or speech patterns. This technique may cause a bit of confusion for an inattentive reader, for the change can occur as soon as the next paragraph while, in the following paragraph, the narrator will restore the traditional third-person voice. Zora Neale Hurston's Their Eyes Were Watching God employs free-indirect discourse so that the narrator's voice can merge with that of Janie, the novel's protagonist.

Modernist literature is very much concerned with interiority -- that is, the private lives and thoughts of characters in novels. If the Victorian era was defined by determinism, the Modernist era was defined by subjectivity. The First World War shattered previously held truths, leaving much of the world in a state of existential crisis, which was reflected in literature and art. What mattered then were not the stories people had been told which described existence, but instead, the stories each of us could tell, as we experienced them.

Individual perspectives and perceptions overruled conventions. Suddenly, people's minds were revealed, even when those minds revealed thoughts that were vulgar, ignorant, or erotic. The pace of the narrative moved at the pace of life. The narrative mimicked the rapid fire of people's thoughts, which were often disjointed. Novelists became less concerned with continuity than with portraying events, ideas, and feelings as they actually occurred.

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