LEAD: In the faraway land of Erewhon, where Samuel Butler derided the hypocrisy of Victorian England, crime was treated as a regrettable malady and health was promoted by vigorously punishing the sick. Imagine the satirist's despair if he could see the Reagan Administration's reaction to the AIDS epidemic.

In the faraway land of Erewhon, where Samuel Butler derided the hypocrisy of Victorian England, crime was treated as a regrettable malady and health was promoted by vigorously punishing the sick. Imagine the satirist's despair if he could see the Reagan Administration's reaction to the AIDS epidemic.

The principal response has been to advocate testing people for the AIDS virus, without saying what is to be done with those who test positive. To read the testers' unspoken thoughts, listen to Senator Jesse Helms. He advocates widespread, compulsory AIDS testing, by withholding funds from states that refuse to test people who are getting married, and instituting a mandatory annual test for the military. His goal, he explains, "is to protect the people who are innocent." Innocent? Of a disease? What would happen to the guilty, those who test positive for the AIDS virus? The Administration's spokesmen skirt the question. Not Senator Helms. He unblushingly carries their thinking to its conclusion. "I think somewhere along the line we are going to have to quarantine, if we are really going to contain this disease. We did it back with syphilis, we did it with other diseases, and nobody even raised a question about it."

One problem with "quarantine" is that infection with the AIDS virus, as far as is known, lasts for life, and no way of expelling the virus has yet been developed. Another is that an estimated 1.5 million Americans already carry the virus. That's three times the total number of the inmates of all state and Federal prisons. Mr. Helms had better start pushing for construction of internment camps.

There's an alternative, more effective and also cheaper: Teach people how to avoid giving or getting the virus. Mr. Helms evidently prefers the punitive approach, the idea that Government should forcibly screen its citizens' health, declare the infected to be guilty and lock them up for life. Samuel Butler wouldn't know where to begin parodying that.