I'll skip the debate and try to answer the question...

I think the restaurant should absolutely have taken some action. I would probably have started by asking nearby diners if they wished to move away from the noise, since they are the ones being inconvenienced. Some might say "move us", some might say "we're fine" and some might say "could you just shut the brat up".

The next thing would be to ask the offending parents (and it is the parents who are offending) if they would be more comfortable in a more out-of-the-way table. If they say they're fine where they are, I would ask them out of consideration for our other guests to please take the baby out until he/she quiets down a little.

If they get offended and leave, I think the goodwill you generate with the other guests far outweighs the offenders' indignation. JMO...