Elves in my campaign are powerful and thriving, but not in ways that make them empire-builders. The role of elves in my game is based on three things:
1) Elves live forever, but they grow less and less like humans as they age. I actually based them on the Pak in Larry Niven's Known Space series (I liked it when I was in my early teens), in that they grow into strong, fast, brilliant xenophobes. Younger elves rely on elders for advice and as a potent line of defense against expansionistic powers. Old "Salath" are, in some ways, like highly cunning animals. They despise most of what we associate with "progress" because, unless visited, they live as pure hunter-gatherers. They are not stupid, but are sensitive to ecological and magical changes in the land. Being killed and eaten by Salath is a real danger for non-elves in elven territories. This does not change the fact that they are actually highly intelligent, however.
2) The ability to reflexively submit to generalized, abstract authority -- a king, lord, high minister, etc. -- is a uniquely human trait in my campaign. Other intelligent beings can learn it, but only humans bow before other humans without having a specific reason. Elves respect others only in particular contexts -- magical ability, skill in the hunt and so on -- making them excellent advturers, but terrible soldiers and (by human standards) politicians. Elves occasionally have "kings," but they're enthroned because they know of an artifact or technique that can bind Salath (elders) to their wills, so everyone is afraid of them.
Elves do not have native words (though they have loan words) for common concepts like war and government. The closest thing to war is a compound word that means, "To hunt, driven by borrowed hatred," indicating that an elf accepts a vendetta against a particular person out of the urgings of a person that the elf respects. The closest thing to a government consists of acclaimed masters of particular crafts and skills who consult with one another to make informed pronouncements within their respective fields. Even then, if the Master of Sorcery says something about how to hunt, it means nothing. This does, however, drive elves to develop extreme skill in at least one niche and to seek out others with complementary abilities. The concept of the "adventuring party" comes from elven culture.
3) Elves do not have collective territorial interests. They make their homes wherever elders live. Settling anywhere else would be foolish and impious when the Salath keep the land. They do not export their own natural resources, but they are highly skilled at various crafts. Elven adventurers typically come from craft-making bands because they're the ones most likely to outfit an elf with generalized gear and teach the value of money, which isn't good for much (precious metal, like abstract authority, is largely lost on them). Enterprising elves occasionally spend a century acquiring a large amount of money for the sake of buying services from other peoples, however.
Similarly, elves do not really have a notion of property, but have an equivalent that might be defined as "What is necessary to answer one's desires." When elves are finished with something they either abandon it or give it away. It is, however, highly insulting to take something that an elf needs to "answer his desires."
These factors have led humans to occasionally believe that elves are poor or defenseless, but no human army has ever held elf territory for more than a few days. The elders are sometimes the cause of this, but it is usually more likely that the invading force impinges on an elf's desires, the elf spreads his resultant hatred to others, and elven adventuring parties kill and/or expel everyone.
