Well, I've got 2 sources here:
My trusty 10th anniversary of The Far Side comic,
and the Minecraft Wiki.
So when you look up 'Cow tools!' on the splash page it says the following:
Refers to a Far Side comic by Gary Larson.
What is the Far Side and Who is Gary Larson?
Well, the Far Side was a hilarious single-panel cartoon.
Here's a sampler:

So, what you see in humor was going on for about a decade in the 1980s.
So, lets get on with 'Cow Tools'
So, imagine you wake up in the morning, getting your coffee ready, going on the front step, ready to read the funnies. And your looking down the aisle of cartoons, and you find this one. What would you be? Mystified? Scared? Well I'm going to quote Gary Larson's (the creators) meaning and response to this cartoon.

"The 'Cow Tools' episode is one that will probably haunt me for the rest of my life. A week after it was published in 1982, I wanted to crawl into a hole somewhere and die.
Cows, as some Far Side readers know, is a favourite subject of mine. I've always found them to be the quintessentially absurd animal for situations even more absurd. Even the name, 'cow,' to me, is intrinsically funny
And so one day I started thinking back on an anthropology course I had in college and how we learned that man used to be defined an as 'the only animal that made and shaped tools. Unfortunately, researchers discovered that certain primates and even some bird species did the same thing--so that the definition had to be extended somewhat to avoid awkward situations such as someone hiring a crew of chimpanzees to remodel their kitchen.
Inevitably, I began thinking about cows, and what if they, too, were discovered as toolmakers. What would they make? Primitive tools are always, well, primitive-looking--appearing rather nondescript to the lay person. So, to me, whatever a cow would make would be a couple notches down the 'skill-o-meter'
I imagined, and subsequently drew, a cow standing next to her workbench, proudly displaying her handiwork (hoofiwork?). The 'cow tools' were supposed to be just meaningless artifacts--only the cow or a cowthropologist
is supposed to know what there used for.
The first mistake I made was thinking this was funny. The second was making one of the tools resemble a crude handsaw--which made already confused people decide that their only hope in understanding the the cartoon meant deciphering what the other tools were as well. Of course, they didn't have a chance in hell."

Im going to stop there. After that, everyone is confused, and he becomes more popular (in summary).
And Notch must have liked the Far Side when he was a child and so he added it in Alpha 1.0.11
Thats the end of this blog, diamond if you like! :D