This wasn't true at all. A lot of popular addons interacted with the browser XUL in incredibly intrusive ways. In particular, addons which altered the browser's tabbed browsing interface and/or behavior (like the various Tab Mix extensions, as well as Tree Style Tabs) tended to do so by making radical modifications to XUL, which would often break other extensions which interacted with tabs.
> Addon developers just namespace their stuff by putting a prefix on their identifiers.
That was not standard practice, unfortunately. Conflicts between extensions were commonplace; it was a rule of thumb to avoid installing multiple extensions which interacted with the same browser feature.
> So don't change Firefox so drastically.
This would have meant effectively freezing most UI development, to say nothing of more ambitious projects like e10s (multiprocess browsing). It would have led to the inevitable death of the project by stagnation.
> Most times, addons are almost like any other program, and should be judged accordingly before installing.
You heavily overestimate the degree of scrutiny that users applied to extensions. The fact that they could be installed from a web interface made users treat them very casually.
> I imagine even after the restrictions were placed on addons, they're probably still capable of quite a bit of malice.
XUL-era extensions had vastly more power than WebExtensions. They were equivalent in power to native executables -- they could run native code, read/write any file on the system, and communicate with any host, all without confirmation -- and there wasn't even any framework to allow developers to voluntarily restrict their power, because they ran in the same context as the rest of the browser chrome.