Lost in Old School D&D (and other stuff)
Gnomes have little-guy cool without all the Thorin and Bilbo baggage. I think their after-thoughtness is probably their biggest advantage; you can shape them into whatever image you want. Personally, I'd rather have gnomes stand alone as the sole shorty race, relegating dwarves and hobbits to the 2-dimensional stereotypes 3 everyone saddles them with.
Agreed, having them as a substitute for both races could be a very good idea. But I like the "baggage" you're talking about. Using tropes helps immensely communicating the story in a specific genre during the game. It needs a certain amount of experience with those tropes to transcend them the way you describe and that shouldn't be a prerequisite to play the game.