Tolkien didn't think his fictional
Elves and
Dwarves really existed.
He was very aware that he had invented them and that they were based in part on the Elves and Dwarves of some folklore and some mythology but were not altogether like them.
Supernatural beings in most fairy stories and legends are vaguely defined, sometimes confused or identified with ghosts of the dead, sometimes beings that we might call lesser gods.
One version of a traditional fairy story may have the hero meet a little man in the forest. In another version it may be a talking animal, in another an old woman. It usually doesn't matter much for the story.
In his essay "On Fairy-Stories" Tolkien does speculate that fairies or elves might exist. We have
tales of sightings of course, just as we have tales of sighitngs of ghosts, gods, aliens,
giants, flying saurcers and so forth.
Some of the tales ascribe actions to a "
goblin" or "pukka" or "hob" or "
elf" or "
demon" that we would today more likely ascribe to a
poltergeist. But the name is unimportant. The stories speak of
objects moving, voices, etc.
Do these things exist? Should we call them Elves? I don't know. I've never never seen such things, myself.
Some of the tales might come from normal differences in size between different
peoples, later exagerated. If the first metal-users in the north were shorter than normal, eventually they might in tales be shortened even further.
These people themselves might speak of the giants in the north, and so eventually long after both peoples had mixed together their tales might still tell of both dwarfs and giants.
Of course, some kinds of dwarfs actually exist, people born with that defomity.
In the Middle
Ages this was sometimes explained by claiming that the
dwarf was a changeling, a being of fairy stock substituted in the cradle by "elves" for the true human baby.
The same might be said of those born born metnally retarded or born with Down's syndrome. The word
oaf is only a dialectical variation on
elf, probably getting its current meaning throiugh some such path. Or it might mean that a person so stupid was under some kind of elf spell.