In the Oscar-winning documentary about the credit crunch, Inside Job, writer director Charles Ferguson spares some of his most vitriolic criticism for Ivy League free market economists. These US academics, argues Ferguson, gave Wall Street banks like JP Morgan and Goldman Sachs and their rightwing politicians on Capitol Hill the intellectual support during the 1990s for a catastrophic bonfire of regulations on the financial sector. Let the invisible hand do the job, said the Harvard, Yale and Chicago school professors.

Their economic philosophy was revealed in a series of interviews by Ferguson who filmed them arguing that a free market should be left to rule without a government hand on the tiller or taxes that distort economic behaviour. The market, they said, propels business people to conduct a relentless search for profit and produce economic goods that benefit all.

The invisible hand releases such a flurry of activity that economic goods trickle down to labour, despite the concern of unions that from those who have first claim on them, the capitalists, will hoard their gains.

Conflating free market theories with utilitarianism, these academics appeared to argue that allowing a free-for-all would bring the greatest benefit to the largest number of people.

Warren Samuels, a professor at Michigan University who died in August, set about investigating what the originator of the term invisible hand, the influential 18th-century economic thinker Adam Smith, meant by the term and examine how it is applied.

In his book, Erasing the Invisible Hand, he argues that free market thinkers, including Smith himself, were ambiguous about what the term means. A close examination of articles, books and speeches over the last 200 years shows it means different things to different people.

Samuels says the academics – and in particular the monetarists and free market cheerleaders of the all-powerful Chicago school, who influenced many senior figures from Margaret Thatcher to Bill Clinton – tailored the term for their own political ends.

Samuels spends much of his book dissecting all the many and contradictory definitions and supposed benefits of the invisible hand. In particular, he debunks the idea that Smith's support for what Keynes later described as the animal spirits of business confidence and pursuit of profit also led him to demand small government.

"That Adam Smith stands for laissez faire, non-interventionism and minimal government is a dominant theme in economics and elsewhere. Was it a misperception to attribute it to Adam Smith? "Smith provided a spirited attack on mercantilism for its extraordinary restraints, but he did not extend the attack to government and law in general. Indeed, many of those who do extend the attack, wittingly or otherwise, are silent about Smith's candour."

He then goes on to quote a passage by Smith that libertarians, Tea Party members and even property-owning middle classes would like to think is less relevant to the present than it so obviously remains.

"Wherever there is great property, there is great inequality … Civil government supposed a certain subordination. But as the necessity of civil government gradually grows up with the acquisition of valuable property, so the principal causes which naturally introduce subordination gradually grow up with the growth of that valuable property … Civil government, so far as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all."

Sadly, crude interpretations of Smith have won important friends, especially since the 1960s, when widespread property ownership became a big issue for politicians. The Nobel prize for economics was first awarded in 1969, and since then has rewarded research into how markets work, with the emphasis on the examination of pure markets and the equilibrium they can achieve if only they are left alone by governments and regulators. All market failures are blamed on interventions. And that is still the case today, with many on the right arguing the banking crash was not the result of too little regulation, but of too much.