I think that Tolkien would have said that he was correcting incorrect stereotypes and "recovering" the true nature of elves and dwarves.

He might have maintained that in the Medieval literature which he studied, the world of faerie was powerful and majestic and awe full and fearsome to mortal man, but the diminution of "fairy stories" into children's stories over time had corroded and eroded the "true" and proper nature of the powerful beings which inhabited the realm of faerie into mere shadows of their real selves.

He was trying to "recover" the "real" nature of faerie and of "fantasy" (or "subcreation", as he might have called it) in his works.

For a deeper understanding you might read J.R.R. Tolkien's lecture "On Fairy Stories", which he delivered at the University of St. Andrews in 1939.

Two of his works which most address his philosophy on fantasy and "fairy stories" are "Leaf by Niggle" and "Farmer Giles of Ham". These make more explicit his views on "fantasy", than his masterpieces about Middle Earth (which totally deliver his philosophy, but less directly).

The folks over at /tolkienfans are the ones ask

Tolkien basically invented the fantasy genre. As you said, his elves are very different from the pre-existing Fair Folk. His dwarves are also very original, they're sort of a mix between the Germanic Nibelung and stereotypes about Jewish people (hard-working, industrious folk with a secret language, insular customs and a love of precious metals).

Almost every modern fantasy trope was either invented or popularized by Tolkien, and he mainly drew inspiration from old Norse sagas and English folk myths, not modern writers.