That’s a very interesting question.
I don’t tend to see dwarves, elves or hobbits/halflings as biological species within the same “tree” as humans. Like, I don’t know homo Sapiens, Erectus and Neanderthal. To me dwarves or orks are creatures of the myth much like in Tolkien’s vision so, I’m not bothered too much about it as a moral question. The D&D subculture and consequentially all gdr culture has gone far from Tolkien’s vision. Or is it? I don’t know maybe the farther it has is the half-dwarf from Dark Sun which… I can’t even look at :_)
So for a game where players can define the distinctive traits of their own mythological lineage (a term that I prefer to use) , I guess it would be much better to have rules to define their custom bonuses or traits instead of fixed stuff ala D&D.
ES I always wanted to make peculiar dwarf people looking back at real world dwarf myths and let dwarves walk and live inside rocks. I could probably do that anyway in DW or Freebooters with custom moves. But if we can go that far, we should also rethink basic PC creation stats bonuses according to that. Meaning that “dwarf” could rapresent something very different from the Tolkien archetype. Another example, if someone have read Bruno Chevalier’s La Légende des Contrées Oubliées fantasy comics, he portraited a very different kind of elves there, which always intrigued me.
Ultimately let’s face it, that is what Tolkien himself did about elves and dwarves. He “branded” them into his own mithology with some pretty peculiar traits that weren’t fixed at all in real world myths.