I've always imagined it was like an ocean. Stripped of memory and identity the souls become a drop in this ocean. Individual souls merge into one whole, just as many drops of water become a puddle.
From this ocean or soul-whole new souls are created.
My question is: what defines race if all souls come from the same place and are therefore equal?
According to the elven creation myth, elven souls are greater than the lesser human spirits, thus their longevity and affinity for magic.. At why point in the soul creation proces is decided if said mortal will be a 'greater' or 'lesser' spirit?