> For that, NPCs need their own motivations, so they essentially play the game too. With needs like maintain their smithy, so they can build quality armor, so they can make customers happy, so they can make money, so they can feed their family. I.e. not just being props

So you want a system like rimworld, and a LLM doesn't really help on that front. It can power the dialogues, but that's it, all the logic you describe would need to be encoded somewhere else.