In this 1968 interview clip that someone has uploaded to YouTube, Tolkien talks about the mythology of Middle-earth and some of the background of the elves and dwarves. Full transcript included below the link.
Everybody, including divine spirits under god, makes mistakes in this mythology, and of course the gods made a primary error. Instead of leaving elves and men to find out their way under the guidance of god, they invited the elves because the rebel amongst them, the wicked god Melkor, was alive and devastated a large part of the world.
They took them back into their paradise in the west to protect them, and so the whole machinery starts from the rebellion of the elves, and therefore, in rebellion of the evil they did in their bursting out from paradise.
So what you've got in our period is two lots of elves: The ones that never started, just didn't want to, never bothered to be anything higher than they were, were the ordinary woodland elves of the far-east.
Those who started to go to divine paradise and never got there, which are the grey elves of the west, and those who got and came back as exiled.
The higher elves, who sing this song to Elbereth in the beginning of the Lord of the Rings, are exiled elves who had once known what it was to see the ?emerging? gods in person.
Now dwarves create a difficulty, don't they, in this particular thing. They have certain grievances against men and against elves. They are incarnate in bodies. While they are like ourselves, we don't know much about them, but they apparently are mortal, they are ?longeval?. Where do they come into the scheme? Well of course, a great deal of sort to provide their origin.
I don't think I'll say anything about it at the moment, but they have a rational origin related to their theme, but they are not part of the children of god. That's all I can really say about this.
Men are just men.