A much more neutral term that does not imply the hype and speculation that surround this field is "molecular engineering" - progress towards actual engineering at these scales is discussed in that article. This article focuses on the longer-term potential and speculations surrounding 'nanotechnology' as it was originally conceived.
Ralph Merkle has compared today's chemistry (in contrast to mechanosynthesis) to an attempt to build interesting Lego brick constructions while wearing boxing gloves. Because we currently have no tools that allow us to place a particular molecule in a particular place (so that it bonds in a predictable way), we must work with randomly moving molecules. As a result, when we cause a particular chemical reaction, we frequently get a mix of several different product species. The reaction is often followed by a physical filtering process to extract the species we actually wanted, with the other species discarded as waste. Nanotechnology could therefore offer much cleaner manufacturing processes than are available with today's bulk technology.
The first mention of nanotechnology (not yet using that name) was in a talk given by Richard Feynman in 1959, entitled There's Plenty of Room at the Bottom. Feynman suggested a means to develop the ability to manipulate atoms and molecules directly, by developing a set of one-tenth-scale machine tools analogous to those found in any machine shop. These small tools would be used to develop and operate a next generation of one-hundredth-scale machine tools, and so forth. As the sizes get smaller, it would be necessary to redesign some tools because the relative strength of various forces would change. Gravity would become less important, surface tension would become more important, van der Waals attraction would become important, etc. Feynman mentioned these scaling issues during his talk. The feasibility of his proposal has never been effectively refuted.
The term nanotechnology was first used by K. Eric Drexler in his 1986 book Engines of Creation: The Coming Era of Nanotechnology.
In the fourth chapter, Drexler introduces self-replication (see also Von Neumann machine), another powerful premise of nanotechnology. Cells build copies of themselves in order to reproduce, and human-designed molecular robots could do the same thing. If a molecular robot were capable of constructing copies of itself from basic raw materials (most likely to primarily be carbon), once the first such robot was constructed any desired quantity could be obtained quite quickly and for a very low cost. (Self replication is, of course, not the only way in which machines can be used to build more machines.)
These same generally capable robots, called assemblers, could then build more special-purpose objects that humans would find directly useful: houses, kitchen widgets, cars, furniture, medical instruments, spaceships, etc. Like the assemblers themselves, these products would be extremely cheap by comparison with those produced today. Specifically, the inputs to any such manufacturing process would be raw materials, energy, design software, and time. For less speculative discussion of this potential, see the separate article on the molecular assembler.
Another application of nanotechnology is utility fog  — in which a cloud of networked microscopic robots (simpler than assemblers) changes its shape and properties to form macroscopic objects and tools in accordance with software commands. Rather than modify the current practices of consuming material goods in different forms, utility fog would simply replace most physical objects.
Whilst progress has been made in producing ever-smaller computer circuits and nanowires, and manipulating individual atoms, constructing real nanomachines is currently well beyond our present capabilities and is widely believed to be decades away. Critics doubt that controllable self-replicating nanobots are possible at all, citing the possibility of mutations removing any control and favouring reproduction of the mutant pathogenic variations. Advocates counter that bacteria are designed to mutate, and nanobot mutation can be prevented by common error-correcting techniques used in computers today. They also note that self-replicating machines are not a necessary part of a productive nanotechnology. Research in this area has included the development of simulation software, such as NanoCAD.
Despite its current early developmental status, there has been much speculation about the impact of nanotechnology on economics and law. Some imagine that money would cease to be of use and taxation would cease to be feasible. Others conjecture that nanotechnology would elicit a strong public-opinion backlash, as has occurred recently around genetically modified plants and the prospect of human cloning. Whatever the exact effects, nanotechnology is likely to upset existing economic structures, as it should reduce the scarcity of manufactured goods and make many more goods (such as food and health aids) manufacturable.
Most futurists and all economists believe there would still be a need for money, in the form of unforgeable digital cash. It might be used to buy goods and services that are unique, or limited within the solar system. These might include: matter, energy, information, real estate, design services, entertainment services, legal services, fame, political power, or the attention of other people to your political/religious/philisophical message. Beyond that, there is war, even between prosperous states, and non-economic goals to consider.
Most people believe that virtual reality will not much reduce interest in obtaining limited resources, such as a chance to talk to the real president of a major country, or owning part of the real Jerusalem, or having a famous celebrity say nice things about you in a digitally-signed document, or gaining the mining rights to the larger near-earth asteroids. Demand will always exceed supply for some things, and there will continue to be a political economy in any case.
Beyond the fantasy scenarios, nanotechnology has daunting risks. It enables cheaper and more destructive conventional weapons. Also, nanotechnology permits weapons of mass destruction that self-replicate, as viruseses and cancer cells do when attacking the human body. There is general agreement that self-replication should be permitted only very controlled conditions, if at all.
There is a fear that nanomechanical robots (nanobots), if designed to self-replicate using naturally occurring materials (a difficult task), could consume the entire planet in their hunger for raw materials, or simply crowd out natural life, out-competing it for energy (as happened historically when blue-green algae appeared and outcompeted earlier life forms). This situation is sometimes called the "grey goo" or "ecophagy" scenario. K. Eric Drexler considers an accidental "grey goo" scenario extremely unlikely. The "grey goo" scenario begs the Tree Sap Answer. How likely is it that your car could spontaneously mutate into a wild car, run off road and live in the forest off of tree sap?
In light of these dangers, the Foresight Institute (founded by K. Eric Drexler to prepare for the arrival of future technologies) has drafted a set of guidelines  for the ethical development of nanotechnology. These include the banning of self-replicating pseudo-organisms on the Earth's surface, at least, and possibly other places.
Drexler and others have extended the ideas of nanotechnology with two more books, Unbounding the Future: the Nanotechnology Revolution  and Nanosystems: Molecular Machinery, Manufacturing, and Computation . Unbounding the Future is an easy-to-read book that introduces the ideas of nanotechnology in a not-too-technical way, and Nanosystems is an in-depth analysis of nanomachines and molecular manufacturing, with thorough scientific analyses of their feasibility and performance. Another notable work in the same vein is Nanomedicine by Robert Freitas.
Nanotechnology is often poorly understood by political commentators. In In the Absence of the Sacred: The Failure of Technology and the Survival of the Indian Nations (ISBN 0871565099) Jerry Mander uses the term "nano-technology" based on a telephone call he had with a writer for Mother Jones magazine. Presumably, Mander believes that MNT would be alienating to American Indians and other Native Peoples, but in Engines of Creation: The Coming Era of Nanotechnology. K. Eric Drexler writes