A Little Magic
Let's assume that George MacDonald is right. (Of course, I'm making this assumption because I think he is right.) The fairy tale/fantasy writer cannot change the moral universe; virtue is virtue, vice is vice--and moral ambiguity occupies pretty much the same huge space in the fantasy world as it does in ours.
Having assumed that much, the writer of imaginative fiction still must decide how much magic there will be in the world of his story. Dragons? Other mythical creatures? People with special powers? Magical objects? Non-human races?
(A side topic: notice that "other races" and "mythical creatures" denote different classes, though there may be some overlap between them. Someday I will post comments on the concept of "hnau," a useful word invented by C.S. Lewis.)
It seems that there are no intrinsic limits to magic in fantasy stories. Therein lies danger. Unlimited magic can become a flood, sweeping away any semblance of realism in the fantasy story. Now, the complete lack of realism might work well in some stories. When Douglas Adams inserts the "infinite improbability drive" into The Hitchhiker's Guide to the Galaxy, he merely underscores the wackiness of the fairy world he describes. It's like Wonderland in the Alice stories. In these world, anything can happen.
But most fantasy writers are not pulling for infinite improbability. Their worlds are, in some sense of the word, realistic. The struggle of Harry Potter against Lord Voldemort only engages the reader because there are some things wizards cannot do. If the imaginative writer were to introduce new magical powers or objects just when her hero needed them it would spoil the story. At some point the protagonist has to succeed or fail with a limited set of powers. If not, we readers won't connect with him.
In my stories, I deliberately take a conservative approach. I allow myself only a little magic. In The Heart of the Sea, I introduce a single magical object, the silbar lux, which has dramatic but limited effects. No dragons, no wizards, and no mythical creatures. (Unless you count intelligent parrots. Hm. Maybe I wasn't as strict as I set out to be.) Beyond the "little magic," my story has many inventions--an imagined world with geography, nations, politics, and so on. And the attraction of the story, I hope, lies in the people of that world, not the magic of silbar lux.
The Heart of the Sea is an ebook, available at SynergEbooks.com.