...and why I don't start with magic.
In the beginning there was a thought. Illuvatar (God with a capital G) is the source of Arda and where my personal thoughts on world-building often begin these days. There is an old adage among gamers that the referee, or DM, has god-like power over his/her/their game. This is especially true in old school games where worldbuilder is one of the cornerstone roles that the referee assumes when they set out to start a new campaign.
In my early RPGing days, I was heavily influenced by the fiction of R.E. Howard, particularly his Hyborean age and most of my settings reflected this. These days I find J.R.R. Tolkien's creation Middle-earth to be more influential on my gaming. Both authors' fictional worlds have heavily informed my stance as referee and worldbuilder, along with a few drabs borrowed here and there from other sources.
So why start with creation of the world? Because, like many I have tried starting at other places, like with figuring out how magic should work in a setting featuring Middle-earth (named as such or not), or just wanting a feeling very similar to that of Tolkien's fiction, and I have found the error in that approach - it's nearly impassible. Middle-earth is not about Vancian magic, or spell points, or even "powers" as have been used in any of the other numerous mechanical ways that games have styled "magical use".
Rather I start with a mental image of the fictional land, before even maps are created, I have formed some idea of the nature of "being" in this cosmos. The brilliance of our good professor in regard to this creation myth/story came to me only after several readings of The Silmarillion. The song of Arda, the role of Melkor in introducing dissonance, the first born, etc. all reflects the will of Illuvatar and plays out through the developing stories as written by Prof. Tolkien, etc. Magic in Middle-earth is just a by-product of creation and this is a very important matter to consider.
A world is a wonderous if not "magical" thing if one only stops a moment to consider all the things that come together to form a functioning planet full of life. It is with this thought that I begin my worldbuilding. Illuvatar had the assistance of his valar and maiar, which together seem rather like old pagan gods (small g) and angels respectively - at least they do in my limited capacity to imagine them. They are the 'hands on" spirits, however, through which creation takes physical form. Creatures to inhabit the new world and playable beings are next on my creation list.
In Middle-earth my understanding of the elves is key to informing how to give this fictional setting its proper feel in game terms. They are immortal beings forever linked to the land. They are spirits with physical form that draw upon and are part of nature and sharing its fate, are more a part of the world than the humans who come along later. Dwarves are beings constructed by Aule the smith and we only learn about one of their seven clans in the fiction- the "Longbeards". Halflings are presumably closely associated with humankind in Middle-earth, with whom they share much in terms of physical make-up (other than height).
The immortal elves, awakened prior to the placing of the sun in the sky, are at home in darkness and under the stars. Some elves have traveled to the west and experienced the light of the two trees, which seems to stay with them even after the trees are gone and the high elves, who have been to the west, have returned to Middle-earth and brought much of the influence of this magical light with them. They are resistant to the effects of temperature extremes and can pass without trace even over fresh snow. They are not just humans with pointy ears.
Dwarves are more than short, stout bearded humans who desire gold and gems (and drink too much). They are the created companions of a crafting god. Laid to rest beneath the earth until after the elves awoke, they emerged to learn, to explore and to name the things they found. Men arrived later with the coming of the sun. Melkor had already been at work corrupting the world long before men awoke because he was jealous of Illuvatar's ability to create (and perhaps wished to claim Middle-earth for his own kingdom).
Taking in all that I have learned reading the good professor - I have come to realize there is magic in the process of discovery!
The "magic" is built into Middle-earth rather than imported from outside. The Magic does not arise from formulas, nor from contacting other planes, or having a bound extra-dimensional being. Magic is inherent in the otherworldliness of our fictional setting and by our "tapping into" the essence of the world's creation, we referees impart a "magic" to everything in our setting - to our creatures, and to our game!
This is how I do Middle-earth (and can do so in any setting that I referee).
With that settled, I can think about the campaign map - my world's map (which will no doubt undergo change as it ages, just as Tolkien's world did). I can think about the characters and cultures, and finally about the rules for the game - all in that order. It all leads back to the setting.
Before I had read The Silmarillion, I thought of Middle-earth as a place where religion plays very little part. That idea now seems naïve to me.