Newt Gingrich, the leading Republican candidate for the forthcoming US presidential election, recently shocked his nation by calling for the re-introduction of child labour. His brightest idea was to "get rid of the unionised janitors, have one master janitor and pay local students to take care of the school". This way, he argued, "the kids would actually do work, they would have cash, they would have pride in the schools, they'd begin the process of rising [above their poverty]".

Although he later qualified his statement by saying that "kids shouldn't work in coal mines" (what a softie!), the proposal reflects his conviction that restrictions on the free workings of the labour market – imposed by trade unions and child labour laws – are the main causes of poverty and inequality in the United States.

Welcome to the 18th century.

That was when Daniel Defoe commented that it was a great thing that "the very children after 4 or 5 years of age could every one earn their own bread" in the textile-producing regions of England. Shocking as it may sound to us, he was merely expressing the prevailing view that the economy works best when there is the maximum freedom of contract, as everyone knows what is good for himself or herself. Insofar as there was no compulsion involved in the contracts, in this view, the government had no business in telling children not to work, restricting people's working hours, or demanding "health and safety" at work.

However, from the mid-19th century it came to be accepted that people may "voluntarily" sign up to things that harm them because of poverty, which leaves them few options. So regulations were introduced to restrict things such as hazardous working conditions and excessively long working hours – anything above 12 hours a day, according to the 1844 Factory Act, albeit just for women and not for men.

At the same time, people began to accept that while child labour might bring short-term benefits, it did long-term harm by making the future workforce less educated and less healthy. The 1833 Factory Act made the first serious attempt to regulate child labour, although it covered only the textile industries and would have allowed Mr Gingrich's child janitor scheme.

Now, if you think it is only the extremist American rightwing politicians who would take the world back to the 18th century, think again. For there is a lot of 18th-century thinking behind what supposedly middle-of-the-road policymakers do these days.

To begin with, look at the way in which the European leaders have dealt with the eurozone crisis. The German refusal to let the European Central Bank operate as a full-blown lender of last resort is based on a very 18th-century belief that such action would save "imprudent" borrower countries from paying for their mistakes. However, from the mid-19th century – more precisely in 1844, when the Bank of England was made the central bank – it has been recognised that in crisis situations an indiscriminate supply of liquidity may be socially beneficial, as it prevents bank runs and financial rot, even though it would save some imprudent borrowers.

For their part, the French have forced the Germans to give up the idea of making creditors to European governments bear the burden of adjustments, should anything go wrong. (So, no Greek-style "haircut" ever again!) This is an extension of the 18th-century view which made debtors' prisons so popular in those days.

In this view, a debtor fails to repay a debt only because of dishonesty or profligacy, for which he should be punished – if necessary, in a debtor's prison. There was no understanding that a debt may be due to factors beyond the debtor's control (for example, a financial crisis). More importantly, there was no acknowledgment that the creditors may actually benefit in the long run by temporarily suspending debt repayment or partly cancelling the debt, thus allowing the debtor to put his affairs back in order and generate income again. It is the recognition of the latter possibility that prompted countries to start introducing company bankruptcy laws from the mid-19th century. In these, creditors are forced to share the burden of adjustments through debt standstills and write-offs.

Another 18th-century idea that is making a strong comeback is found in the British coalition government's reform of the welfare state and its attempt to make firing of the workers easier – summarised in the words of Iain Duncan Smith, the work and pensions secretary, that "you should be better off in work than out of work".

The underlying idea is that, if we are to make people work harder, we should increase their fear of unemployment by making it easier for them to lose their jobs and by making their unemployment benefits less generous. (Mr Gingrich may have proposed the revival of the workhouse at this point.)

This thinking may have had some validity in the 18th century because most jobs required few skills, and therefore the productivity of workers may have depended more on how fearful they were of losing their jobs than on the quality of their work. However, in an economy with highly skilled jobs, fear becomes counter-productive. Such jobs require complex thinking and initiative, and fearful workers are not best suited to performing them.

This is why, from the late 19th century, countries started to provide greater security for their workers by expanding the welfare state and making firing more difficult. This point seems to be completely lost on the coalition government, even as it sees that unemployment rates are lower in those Germanic and Scandinavian countries with much bigger welfare states and more restrictive labour laws than those of Britain.

Hopefully we are not going back to the world of child labour, debtors' prisons, workhouses and bank runs any time soon. However, the way in which our current policy debates are shaped by outdated ideas is frightening. We are in this mess exactly because over the past three decades we have fallen head over heels for an outdated 18th-century idea called the "invisible hand". We are not going to get out of it by adopting another bunch of ideas from the same bygone era.