Very interesting question Saucy: is there some kind of evolution in ME?
Problem is, there's a possibility that we'll end up discussing the theology of ME. As it is a "magic" world, we can assume that the story of creation in this case is true. And I don't mean to offend someone, but most people don't believe that Earth was created in 6 days nowadays. Now this raises new questions. In our world, evolution is a crucial part of life as we know it. Without evolution no living organisms would have developed. But in a world were a Creator (or Creators as it was the Valar that gave ME it's final shape, even if Eru created men and elves) really made everything complete from the beginning, there's no need for evolution.
And if we go a step further, there's no need for individuals to be different from the others. Actually, they shouldn't be different as different traits leads to different success in life and in mating, which leads to evolution. Asssuming the plants, animals and other living things in ME has the same way of passing characteristics to their offspring as the organisms of Earth has.
But of course there's differences within the races! No elf is the other alike. So is there evolution in ME? I'd say yes, probably.
BUT the hobbits might still have been created as a separate branch of men from the very beginning. I find it hard to believe that the hobbit characteristics would be of any great advantage over the characteristics of men. After they were created, they have evolved even further as everything else in ME probably has. The birds were created birds, not reptilians that developed feathers and so on. But then some kinds of birds has disappeared while new species has evolved from others. It's a mixture of evolution and a divine creation that has formed the flora and fauna of ME.
What effects do this theory of mine have on the question whether Hobbits are a chosen people or not? Well, not much. The progress of evolution doesn't mean that hobbits are something else than what Eru wanted them to be from the beginning. He(or maybe she?

) might very well have predicted this small changes and Bilbo and Frodo are the end products of a long-term plan of Eru.
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I found a quote that supports some of my earlier
posts about hobbit's lack of greed and other human traits (The Letters):
Quote:
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The Hobbits are meant to be a branch of the human race, not dwarves or elves. Hence the two kinds can live together as they do in Bree, calling themselves the Big Folk and the Little Folk. They have no non-human "powers" but are more in touch with nature such as the soil, plants, and animals. Abnormally for humans, they are free from ambition or the greed for wealth. They are small, half human stature and dwindling with the passing of years. The size is partly to exhibit the pettiness of plain, unimaginative, parochial man. The other reason is to show, in creatures of very small physical power, the amazing and unexpected heroism of ordinary men "at a pinch".
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The underlined part tells me that they should be great carriers for, well let's say... powerful rings?