Here is what I see happening at Etsy:
Seller comes up with a design for a necklace. Seller hires another Etsy Seller (like the one pictured below) to make this “custom” necklace in large quantities. Seller sells these perfectly Etsy-legal necklaces in their perfectly Etsy-legal shop. (Certainly Etsy would not question the “manufacturing assistance” of another Etsy-legal shop.) And voila! Mass-produced, handmade necklaces!