Little Guy –
DWARVES ARE DOPE
There are a few reasons that it would be seen as a pejorative term. First, the term “midget” was widely used in circuses, where dwarves were part of freak shows. They were objects of revulsion. Later, they became things of wonder, (see the Wizard of Oz and Willy Wonka.)
Second, the etymology of the word is offensive. It comes from “midge,” which means gnat, and the -et suffix, meaning small. So a midget is a “small gnat,” a nuisance, an undesirable.
Third, “midget” is used to describe things: midget submarine, midget golf, midget car, etc. It then becomes possible to think of a midget as more an object and less a person.
Dwarf, by comparison, doesn’t have any of these stigma. Dwarfs share a classification with mythological dwarves, but 1) dwarves didn’t have a size attributed to them until relative modernity 2) dwarves, while they have their negative traits, are often portrayed in a positive light – master craftsman, brave, etc.