Lucius' anger over losing Dobby to Harry's deception makes a bit more sense now.

Which is the worse fate: having magic but live as a house elf or be born a squib?

 

So to try to understand house elves and how can we explain why wizards don't use them more since they seem so powerful...
What if we look at Rowling's inspiration for house elves (the brownies), with the idea that it gives us an insight into house elves because Muggles knew them before the Statute of Secrecy ?

They are household spirits, expert at sneaking, that can turn invisible and into animals. They come at night, when people are asleep, usually to perform household and farming tasks, rarely garding treasures.
--> « farming tasks ». We see Snape offering elf made wine to Narcissa and Bellatrix when they come for the unbreakable vow, so we can imagine that house elves not only work for families but on wizarding farms/vineyards ? (for example at the eel farm mentionned at the world cup).
--> turn into animals / garding treasures (we don't really see that – except if Fluffy was a house elves in disguise )

Are naked or dressed in rags. Present them with clothing or give them a name and they leave forever.
--> fits with the HP books, except for the name thing. Though house elves seem to have « childish » names (Dobby, Winky), are they nicknames given so that they don't go away (it's not really an official name) ? Do we know the name of other house elves ?

Want an offering in return (often milk). Has to be left and the brownie takes it when people are away. Are solitary and avoid been seen.
--> so they have to be paid in kind (food), not money
--> house elves are not usually seen : not a rule enforced by wizards, but simply their preference, their nature

Are mischievous (« the brownie at the Portway Inn in Staunton on Wye reportedly had a habit of stealing the family keys »), punish lazy servants.
--> coexisting with humans servants difficult ? Is that why households with house elves don't have human servants (that we know of) ? Maybe Filch is so grumpy because he is constantly pranked by house elves ?

Motivated by "personal friendships and fancies".
--> Dobby decided that he was Harry Potter's friend and did whatever he fancied.
--> Winky took the initiative to ask for Barty Jr. to be taken to the World Cup because she liked him / felt sorry for him.

« If the brownie feels he has been slighted or taken advantage of, he will vanish forever, taking the prosperity of the house with him. Sometimes the brownie is said to fly into a rage and wreck all his work before leaving. In extreme cases, brownies are even sometimes said to turn into malicious boggarts if angered or treated improperly. »
--> so house elves... a sign of prestige or not ? Apparently garantee that your household prosper, but they can also be pranking you, ... not sure if having house elves is such a boon, exorcising them with clothes (or a name) seems a good idea.
--> Except that because of the Statute of secrecy house elves don't have many places to go to, so wizards are stuck with them. May explain why there seems to be such a community of house elves at Hogwarts, even if house elves are solitary by nature, now they don't have much choice.
--> Fly in a rage and wreck his work before leaving : is annoying but not that dangerous I guess (not killing their master, not destroying the whole house, just their own work)
--> turn into boggarts : so they are kind of spirits. Ok that can be dangerous, except that it is not clear exactely what a boggart does, it is malicious but not a serial killer.

« A brownie is said to take offence if a human observes him working, if a human criticizes him, or if a human laughs at him. Brownies are supposedly especially angered by anything they regard as contempt or condescension. »
--> Huh. Hermione, be careful there.
--> All the students sneaking out at night are annonying the house elves because they are working at night and don't want to be observed ?
--> Students going to the kitchens for a snack, realistic ? Do we really see that much of it in canon ? Can students request a picnic basket to go outside ? Somehow I doubt it. House elves seem to be doing their thing and not happy to have much contact with humans (much less being ordered about by students).

« As immortal spirits, brownies could not be worn out nor revitalized by working, so their work became seen as simply part of "a perpetual cycle that is akin to the activities of Nature herself. »
--> Immortal ? Do we know how old house elves can be ? Kreacher looks old, but maybe it is only a consequence of being unhappy ?
--> « could not be worn out » : so they don't get tired ? Do we see house elves needing a break in the books ?

« A brownie from Jedburgh is also said to have desired clothing. [...]The laird ordered for a green shirt to be made for the brownie. It was left out for him and he disappeared forever. People assumed he had gone to Fairyland. »
--> The shirt freed the brownie even if it wasn't given directly to him but because it was MEANT for him. (So the knitting Hermione was letting in the common room could have really freed elves ? because it was meant for them ? It was at least really offensive !).
--> Apparently is can happen that some house elves want to be freed, but it is rare. And then they... go to Fairyland? Die ? Disappear ? If they are immortal spirits it is their way of « dying » when they feel they have lived long enough ?


So the global impression is :

They are spirits, not subserviants, and seem pretty free to come and go when they want (leave as soon as they feel slighted, following their fancies).
--> not very consistant with the books where they can be kept and ordered around. We can imagine wizards having to keep house elves close post Statute of Secrecy (because otherwise they would go wreack havoc in muggle households), somehow bound them or made a pact with them...
--> They can be ordered only to an extent, apparently Sirius couldn't order Kreacher not to utter racial slurs and to be polite. And Kreacher seemed to choose how much he cleaned Grimmauld Place (not a lot). Also, Winky taking initiative that results in Barty Jr getting free.
--> Dobby basically frees himself, declaring to have received clothes on the flimsiest of pretext (isn't magic supposed to be about intent ? Malfoy didn't even know the sock was there)

They are not humans, don't really want to interact with them, on the rare occasion they interact it is ON THEIR OWN TERMS. They are offended by things we would consider nice (receiving clothes instead of rags). They are neither good nor evil (except for the turning into a boggart thing).
--> Hermione was bound to fail with SPEW because basically house elves don't give a shit about humans and human values. She treated them as humans, expecting them to want the same things as humans, when they do not (as Ron told her until he was blue in the face, but when ever does she listens to other people ?).
--> Hagrid tells Hermione that freeing them would be unkind : it really goes against their nature I suppose, if even Hagrid who is all for dragons and giant-man-eating-spiders living their lives how they see fit tells her that...
--> Could be a reason wizards (secrets) are safe. Because basically house elves don't talk with wizards, don't care about the politics/affairs of wizards, so won't gossip about them, won't take a side or another (with the exception of Dobby, but he doesn't seem to be typical)
--> so no overpowered house elves assassins or spies, they are more pranksters on their own initiative, even boggarts seem to be more bad luck than lethal threats (?)

--> I like the idea that you can not really order them to do house work, but rather you are channeling their natural tendency to do house work, meaning you can't give them tasks that they are not interested to do in the first place. Which may explain why we don't seem to see any house elves in shops (as sellers, I can imagine them cleaning shops), or being used as messengers instead of owls (at least I don't think we ever had house elve delivered messages?), or even being used to apparate people to safety (if they can get through « wards »)... or... basically they may bring luck and be useful for a limited array of tasks, if you treat them well, but are not really that reliable and cannot be used for everything.