You're beginning with a false assumption, which is that the ballads must be describing a realistic interaction or situation. In fact, they describe recognizable, conventional, formulaic situations, not realistic ones. To try to impose "realistic" logic on them is silly. It would be like doing a statistical analysis of the milk-white steeds and dapple greys, and trying to determine what historical period in Britain would have matched the relative preponderance of these two types of horses. Or to examine fairy tales and try to decide if the magic comb that allows you to fly might be a reference to a folding hang-glider.

As Malcolm has already said, this is a ballad commonplace. That means it is a situation that proved useful to enough ballad composers and singers that it became a formula. A wee pen knife was a useful concept to the ballad because anyone might be carrying one, including children ("The Two Brothers,") women ("The Cruel Mother,") Lords ("The Cruel Brother,") etc. This made it possible for it to become a commonplace--a way of murdering someone that travels from ballad to ballad and can be "plugged in" to any narrative where someone needs to be stabbed. Thus, the fact that it also turns up in the hands of robbers ("Babylon") doesn't mean we have to search for an alternative explanation. It's just a formula.