The creature known as a "dwarf" is, in fact, two separate living creatures. The "dwarf" is actually a human, albeit altered from the norm due to adaptation to underground environments and heavy drinking. The other creature that combines with these humans to create a "dwarf" is a beard. The creature is actually a parasite, with a small, flat body and a large, bristly coating on one side that gives it a striking resemblance to facial hair. This parasite attaches itself to a human or other intelligent host, preferably at birth, and enters a kind of symbiotic relationship with the creature.
The beard drains nutrients from the host at first, which can severely limit the growth of a child, both physically and mentally. This makes the host easier for the "beard" to control, and results in the short, stocky appearance of a "dwarf." Once the child starts drinking and eating on its own, the "beard" can live off the food and beer that gets caught in it. The parasite greatly prefers beer over solid food, and drives the host into drinking more than eating. As a result, the host will drink almost double what it eats, and "Dwarven" fortresses will often be stockpiled with more booze than food. Should the parasite be deprived of beer and be offered only food, it will resort to draining nutrition directly from its host, resulting in the host becoming lethergic.
The host, however, gains the impressive talents the parasite offers. The host's "beard" can be used as an all-in-one tool, doing practically anything the host requires. "Dwarves" can often be seen preforming tasks such as stone carving, butchery, and even metalsmithing with no tools other than their beards. The beard can also act as an impressive sensory organ. It can sense tiny changes in the air around it, giving the host a general idea of his surroundings even in pitch black darkness, which "Dwarven" fortresses are often in.
Should the parasite be forcibly removed from the host, the host will suffer severe damage. The "beard" grows deep into the host's nervous system, and removing the parasite can damage or destroy large sections of that system. As such, once a parasite attaches itself to a host, it should be removed immediately or forever left alone. When the host reproduces, the parasite will use the host's reproductive system to grow another parasite along with the developing host baby. Once the infant is born, the newborn parasite will immediately attach itself to the baby, giving the impression that the baby has been born with a beard.
So, today I got bored. I thought to myself, "what if there was some kind of explanation for all the crazy crap that goes on in Dwarf Fortress?" So, I took it upon myself to try to dive into the workings of Dwarf Fortress, the kinds of things we cannot see from our overhead perspective as minor avatars of Armok. So, if people like this, I'll post my study of Elves and come up with something for Goblins and Cutebolds. Read it! Tell me what you think!