This was a knife crafted by a mental patient from the 1800s and the object was made precisely and whoever the patient was, they took their time on this artifact. The knife was believed made for an escape or the possibility of killing a nurse.
In this quote Adam Smith describes how a human craves for attention and affection. This can be clearly connected in context of Fantomina who constantly changed her personality to satisfy her such needs.
Adam Smith describes an economic system designed such that individual greed and selfish passions are leveraged to do societal good. He intends to phase out the mercantilist system that was dominant at the time.