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To begin any discussion of H. P. Lovecraft, one must begin with an analysis of the times in which he lived, the times where science seemed to explain everything, when human knowledge was expanding at the greatest rate that it possibly could. Paradoxically, there are many parallels between the time of H. P. Lovecraft and our own modern times. While it is important to understand that the times back then were filled with great scientific promise, it is also important to understand the scientific backdrop to which he writes. Most important to the writing and understanding of H. P. Lovecraft's fiction is the eugenics movement, as his disdain for people of "lesser races" becomes rather apparent in short stories such as The Street, and make an appearance in his novella, The Shadow Over Innsmouth, an allegory in itself warning against racial mixture. It is possible to separate his writing from this eugenics movement, but it is impractical.
In several senses of horror, I agree with H. P. Lovecraft, but the racist undertones and explicit racism he expressed during his life somewhat taint his work. Sciences such as neurology and psychology were only beginning to write of what drove humans, and the philosophical and religious context of his own writing is also incredibly significant. The other elements which influence his writing are the mixture of western and eastern philosophy and occultism that pervaded because of the spiritualist craze and the theosophical society, whose influences are also plainly visible in his writing. There are several literary influences as well, most apparently Lord Dunsany (whose landscapes and mythos influenced his writings before the creation of Cthulhu) and Edgar Allan Poe, whose influence upon The Alchemist, The Tomb, and The Thing in the Cave are very much apparent as well, in both the structure of his sentences and the style of horror that he wrote. Meanwhile the Dream Quest of Unknown Kadath is the most obvious inspiration he drew from Lord Dunsany, whose Gods of Pegana illustrates a like world.
The style of H. P. Lovecraft is most similar to that of Edgar Allan Poe. It is at the same time atmospheric and archaic by today's standards. The style is less flowery than Poe, but not enough to make it more accessible to the people who read it. Also, themes appear in Lovecraft that do not appear so much in Poe, including class, heritage, and race. Heritage appears in Poe's stories, as well as class, but this is not tied to the elements of eugenics that appear in the stories of Lovecraft, who often refers to the original Dutch settlers of New England and their descendants as decadent, degenerate, inbred cretins who are barely fit for human interaction, depicting the local populace as superstitious idiots in "The Lurking Fear."
Meanwhile, he explores themes of the unknown and the edges of human conception and perception in his stories, perhaps his greatest contribution to the genre of horror. In fact, I would say that his philosophy of cosmicism is one of the most influential philosophies in literary horror ever to exist in American short fiction. While it explores the depths of the human mind, it attempts to explain that we are but tiny portions of a massive and incomprehensible whole that is reality, and that the nature of that reality is so abstract that true comprehension of it would drive us insane. Many of his characters are at the ends of their lives, no longer willing to endure the pain of understanding, the pain of knowing what exists in the universe aside from them. The Shadow over Innsmouth ends with the main character going to the ocean to join the denizens of Innsmouth in Y'ha-nthlei, going insane because of his realization that he is a descendant of the same race of fish-frogs that the people of Innsmouth have begun turning into.
While this type of horror is terrifying, I have heard many criticize his writing as incredibly unrealistic, but if they were talking to him, he would merely call them "unimaginative" and "uninspired" and say that their own certainty is foolish and misguided. I tend to agree with his assessment of this type of criticism. His writing is realistic in that we cannot understand the true nature of reality and any reading into it as empirically real is a drastic misunderstanding of his own philosophy, which rejects empiricism. The single criticism I can accept aside from the racist nature of his writing is that his stories become at times repetitive in nature, beginning and ending in much the same way, but with different plot points. It's almost as though he has a simple template and injects enough new elements to make them distinct, but the themes are much the same.
Regardless of his racism, his literary style and contribution of cosmicism is one of the most important elements of horror in this time period. Post-gothic horror was altered tremendously by his and others' contributions to the field of horror posed in the Cthulhu mythos and the incorporation of Dunsanian and Poe-esque elements. While I find many of his stories upon race and other such topics to be horribly opinionated, I must acknowledge his mastery in creating atmosphere and suspense. There are few other authors who can inspire such an existential dread in their readers and contemporaries.