Away with the fairies
Not facing reality; in a dreamworld.
This phrase has its basis in the Scots/Irish Gaelic tradition of belief in a set of folk myths, the cartoon version of which is a belief in the existence of 'the little people'.
In a mythology that compares with the current fad for stories of abduction by aliens, Irish folklore had the alien role played by the Sidhe, a dominant, supernatural clan of fairies. The stories involved the Sidhe appearing from some hidden place, either their underground lair or from an invisible world, equivalent to contemporary science's notion of a parallel dimension, and spiriting people away. In another link to current scientific understanding of relativity, the stories usually involved the victim returning after what seemed like a few hours only to find that many years had passed in the world of humans.
The everyday belief in a nether world populated by fairies, elves, pixies, leprechauns, goblins and the like was commonplace in medieval Europe, as was the belief in their interaction with the real world. A letter to the Scottish poet William Drummond, dated October 1636, contained the following:
As for the Fairy Queen, of whom you wrote to me, her Apparitions of late have bewitched so many, that I find sundry ready to dance with the fairies.
The belief in people being taken away by the fairies was very well-established by the time that the phrase 'away with the fairies' first came to be used - which isn't until the 20th century. This earliest example of the expression that I can find in print is in the New Zealand newspaper The Otautau Standard and Wallace County Chronicle, May 1909. This retells a story from Ireland, in which a Michael Coyne attempts to convince onlookers that he hadn't murdered his rival, James Bailey:
[Coyne] "Don't mind your son; that is not him you see there." Bridget Bailey understood that he meant that her brother was away with the fairies.
The phrase didn't begin to be used in its current figurative sense until the late 20th century. This item from The Washington Post, June 1987, is typical of the examples of the phrase that are commonly found from the 1980s onward:
"Still away with the fairies, the fey and gentle Incredible String Band epitomised the hippie ideals of the Sixties."