Små is the plural form (but not necessarily the e-form) of lille which is a irregular adjective, for example:
Den lille bog -> De små bøger
Huset er lille -> Husene er små
En lille mus -> Små mus
When do we use "smule" and when "lille"? Is it the same as in English "small" vs "little"?
"de" means both "they" and "the" (in case of plural nouns). It is not den, because bøger (books) is plural: "den lille bog" = the small book, but "de små bøger" = the small books.