You know, I have a theory about this. I think House Elves were created by blending one creature with another, to create a special servant to do their bidding. I think a LOT of magic was involved in this creation, but House Elves were not original creatures.

I think they were created with the specific purpose to serve in their genetic make-up. So they don't know how to do anything else, because their creators made them that way. Of course, there is always the wayward house elf (Dobby) who is a bit wonky, but isn't that the way with every prototype? They can't fix every glitch in the system.

But I do think that as time went on, they started breeding their house elves to create more and more, so the line would continue and they wouldn't have to create more elves by themselves.