In movies, there's music that both the characters and audience can hear, and there's music that only the audience can hear. The same is true with humor.
By all accounts, the late movie cowboy Gene Autry was a fine fellow and a savvy businessman, having owned a record label, a production company, and a baseball team. He was as widely known for his westerns as he was for making a hit song out of "Rudolph, the Red-nosed Reindeer." He made a ton of "B" westerns in the 40s, and had a TV show in the 50s, all aimed at the kid audience.
Those kids probably didn't care that Gene wasn't the greatest actor, and that he seemed to have only two facial expressions, concerned and smiling. He never knew what to do with his hands, so when he wasn't playing the guitar or punching a bad guy, he hooked his thumbs over his gunbelt. Gene's acting chops matched his voice, which was less than resonant, kind of nasal and twangy. He could carry a tune as long as it wasn't very heavy.
Sometimes Gene played his guitar as he sang for an audience visible within the movie, and that made sense in both the real and reel worlds. But sometimes we'd see Gene and his sidekick, Smiley Burnett, riding their horses along some desolate trail west of nowhere, just the two of them, when Gene would abruptly burst into song. Not only did Smiley see nothing odd about this behavior, he didn't even react to the full (and fully invisible) orchestral accompaniment that Gene seemed to carry around with him. In fact, Smiley even sang along.
Then after the song was over, the two good guys would run into some baddies. A rousing chase and fistfight would follow, with exciting music accompanying the action.
Obviously, both the audience in the story and the audience watching the movie could hear Gene's guitar when he was playing for them. That's diegetic or "source" music, a part of the story. And just as obviously, Gene and Smiley could not hear the music when they were chasing and fighting the bad guys. That was non-diegetic music; it was there as dramatic effect for the benefit of the audience. The music Gene sang to while riding along the trail falls into a kind of music limbo.
According to Pauline Reay's book, "Music in Film: Soundtracks and Synergy," diegesis is the story world depicted on the screen. We the audience could hear all of the music, but the characters could hear only some of it. I believe the same is true with humor.
Fast-forward fifty years. "Frasier," starring Kelsey Grammer, was a popular spin-off of "Cheers." Aside from being a well-written show, it was superbly cast, each actor making us believe in his or her character. One of those splendidly fleshed out characters was Frasier's über-fussy brother, Niles, played by David Hyde Pierce. Niles was quite the intellectual, like his brother. One day Niles walked into the studio of Frasier's radio program to show him a rare book he's just bought. Niles says, "I wanted to show you my copy of 'Saint Katy, the Virgin,' in like-new condition." Frasier replies with a knowing grin, "Yes, well, she'd have to be, wouldn't she?" Niles smiles, and the audience laughs.
Later in that scene, they learn that their favorite restaurant is closing forever. Niles gets wistful for his eighth birthday party, which had been held at the restaurant, and where he was just as fussy. Niles says wistfully, "Great times. Opening presents, wearing funny hats, sending back the veal Prince Orloff." Frasier doesn't smile, but the audience laughs.
Each of those jokes is in a different form. The first one about Saint Katy is diegetic, that is, it takes place in their world and is acknowledged by the characters as being a joke. Niles smiles at Frasier's remark about the book, just as someone would do in the real world. But the other funny line would not be considered source humor. Niles' line about sending back the veal was non-diegetic. Frasier did not see it as a joke, only an example of Niles' personality.
("Frasier" was one of the few shows I've seen where the people in the story laugh at the funny things others in the story say. Compare it to "The Bob Newhart Show," the one where he plays a psychologist. The characters don't laugh at each other's jokes; only the audience does.)
The second "Frasier" joke was character-driven; the first was not. That's the difference. We the audience could hear all the humor, but the characters could not. Just like the music in Gene Autry's movies.
Decide what kind of humor you're using in your stories, both in print and on stage. Is it a joke that other people in the story recognize as such? Or is it character driven humor that blends seamlessly with the world of the story?
If you're on stage and you tell your audience something self-deprecating and funny about yourself, it should come off as non-diegetic. You should not act as though it's funny to you; allow the audience to get it on their own. But if you tell them an actual joke - which I don't recommend unless you're a trained professional and wearing a helmet - allow the audience to know that you know it's a joke. Don't laugh at it, just acknowledge the humor.
And don't hook your thumbs over your gunbelt.
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