Well, it can be both, right? I mean, it can be a phallic symbol but still have the whole "ethos" deal going. wait, do you mean like in "Ethos, pathos and logos?"
As for Vivec's children, another conclusion is that they are both metaphor and literal, dangerous ideas that the "king" part of the 'god-king" saw as a threat to be stamped out. In a world where myth and semantics are as concrete as brick and blade, they could also have been subsequent physical creations born of the power of the ideas themselves, to give a literal show for the metaphorical putting down of unapproved thoughts?
I'm not sure if the phallic symbolism adds anything useful to the concept of the Ethos Knife. Where is the Ethos Knife used in a phallic/sixual way? (I could be forgetting something, I haven't read the lessons closely in a long time).
http://dictionary.reference.com/browse/ethos
?noun 1. Sociology. the fundamental character or spirit of a culture; the underlying sentiment that informs the beliefs, customs, or practices of a group or society; dominant assumptions of a people or period: In the Greek ethos the individual was highly valued.
2. the character or disposition of a community, group, person, etc.
3. the moral element in dramatic literature that determines a character's action rather than his or her thought or emotion.
That's what I mean.
Honestly, if you want to understand something in the sermons (or any other work of literature, ingame or out of game), start by seeing what the actual word means, and then try to see how the word is being used specifically in the context of the work.
On Vivec's children, I take the Eight Monsters to be the precursors to the Aedra, hunting them down amounts to putting the world in order. Something similar can be said as regarding gathering the eight spokes and making the wheel. The thousands of other monsters were concepts that ultimately didn't play a role in the creation of the world.