This is from the last sentence of the first part of the Prologue in The Fellowship of the Ring, subtitled "Concerning Hobbits".
Tolkien wrote this section as a bridge between the light storytelling style of The Hobbit and the more serious style of The Lord of the Rings. It serves as a bit of character development, characterizing Hobbits in general as stodgy and phlegmatic.
Hobbits read books, but they like to read about familiar, uncomplicated things that don't challenge their preconceptions. "Set out fair and square" is just a way of saying that Hobbits like to see uncomplicated, easy to read prose with not too many long words. Moral ambiguities need not apply.
The Hobbit is a bit like this (Tolkien originally intended it for children), but The Lord of the Rings is not. The Good Guys don't always do the right things.
Tolkein's prologue serves to underscore the extraordinary deeds, and transformations, of four particular Hobbits that The Lord of the Rings revolves around.
I also think that this particular passage is a deliberate warning to readers that Things Are Going To Change: You might have to read between the lines, and there is moral ambiguity (or at least nuance) ahead.