Well at one level I would say that photo retouching has been there for a long time. Photos in advertising have always been manipulated first of all in camera with perfect lighting in purpose built studios (ideal conditions for showing the product off).
Later in the lab photos were retouched to remove undesirable bits and enhance the good bits. This included dodging, burning, cropping, using different chemicals or papers to attain a specific goal. Little brushes with dyes were used to paint out imperfections ( I think that is where the word retouching came from!)
What digital photography and Photoshop have done is to make all that process much easier and quicker. And crucially from a business point less expensive. So there is a lot more going on.
In my experience all advertising (or 99% of it) misleads the public about their product. It portrays its best qualities, exaggerates its performance, neglects to tell you about downsides. Frequently it is just selling you a dream or a promised lifestyle – you will be sexier, more attractive, thinner, cooler, be one of the beautiful people if you buy their product.
Photoshop is just a new tool to help them sell you a dream.
On a different level there may well be ethical issues in that the quest for a specific body shape seems to be encouraging more and more people into plastic surgery and unhealthy dieting etc. That is a big issue and I am not sure how it can be addressed.