Why is Don Quixote by Miguel de Cervantes considered the first modern novel? 

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Whether or not Don Quixote is the first modern novel is debatable, but proponents of this notion argue their case with the following considerations:

Don Quixote is a work of literature that combines genres, and this multi-faceted approach to storytelling makes it the first modern novel. Cervantes brings together elements of tragedy and comedy, epic and picaresque, the pastoral and the love story in Don Quixote. Up until this point, some scholars argue, works of literature individually fell into one literary category, and Don Quixote is the first to defy such easy categorization.

Don Quixote is such an original work, made up of a combination of literary characteristics, and this originality makes it the first modern novel. According to some scholars, Don Quixote is not pure in its existence as a literary work of art; it does not have the linear narrative and careful plotting, for example, that defines modern standards of excellence. Instead, Cervantes explores cross-over techniques that lent the original readers of Don Quixote a completely new literary experience for that time.

Don Quixote, the title character, and his sidekick, Sancho Panza, are both problematic, complex beings whose inner lives are reflected in the events of the novel and in their interactions with others. This presence of complicated people who must endure the inevitable passage of time universalizes the novel, and according to scholars who believe Don Quixote is the first modern novel, Cervantes is the first writer to make such authentically human experience live on the page.

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Don Quixote is considered to be the first modern novel because of the fullb as of the characters and the quality of the prose. The central figures of Don Quixote and Sancho Panza each have elaborate inner lives (interritory). The reader watches them grow and change throughout the text in what has come to be called a character arc. They are dynamic, flawed figures, unlike the perfect heroes and irredeemable villains of the Ancient Greek and Roman epics.

Carlos Fuentes of The New York Times adds to this reasoning that Don Quixote is among the first texts to employ multiple idioms for different characters. The characters each have their own distinct voices, rather than all perfectly reflecting the voice of the author/narrator. Quixote speaks in a heightened vernacular reflective of his lofty ideas about his own person while Sancho Panza speaks in a more lower class idiom of a servant. This is a distinctly modern method of characterization.

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In The Man who Invented FictionWilliam Egginton argues that Don Quixote is the first modern novel because it's the first to explore a character's interiority and the way characters, such as Quixote and Sancho, transform through being in relationship with each other. If the romances that Don Quixote parodies and the satire that the book embraces (and transcends) both feature stock, one-dimensional characters, in Quixote Cervantes invents something remarkable, says Egginton, calling it "a new language ... fiction." 

The remarkable innovations that make Quixote a modern novel are as follows: Not only do Cervantes' main characters have an interior life and grow through relationship with each other, Egginton argues that they draw us as readers into their own unique ways of seeing the world. In Quixote, in other words, Cervantes shifts from external character descriptions to actually letting us experience the world through various characters' eyes. And not only does Cervantes reveal to us different characters' points of view from the vantage point of their interiority, he shows how different characters can differently experience the same situation.

Finally, says Egginton, Cervantes also innovated in showing that characters play roles without necessarily believing them. That slippage between how a character is seen by the world and what is going on inside his or her mind, says Egginton, is essential to a character's ability to spring to life.

One might argue that Shakespeare and other Renaissance dramatists do the same thing at roughly the same time in drama (Hamlet surely springs to mind) and Montaigne with the essay, but Quixote represents an early and wildly popular attempt to create fully formed characters using prose in the context an imagined situation.

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This is because of the strain of realism throughout the novel which continually debunks the title character's fantasies and exaggerated love for adventure, which is typical of the older prose form known as the romance. (Think, for example, of the medieval Arthurian romances dealing with knights, beautiful ladies and great battles and monsters and so on.) Sancho Panza, Don Quixote's companion, is the embodiment of this strain of realism.

When the novel first developed as a distinct prose form about four hundred years ago it laid a new stress on everyday events and characters which has generally persisted to this day. Don Quixote was enormously influential throughout European literature in this shift towards realistic prose narratives.

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