I think there are lines to this all.
I went to a high school for the performing arts (yes, like Fame...). We could wear just about anything and there was just about everything from the preps with their skinny ties in jazz band all the way to the sculptors with 5 color mohawks.
I think you have to let kids *try* to express themselves, and teach them to play the corp game later if that's what they want. The problem with making them dress a certain way is that who is to say what is the "right way" to dress? I mean there is common sense when it comes to hate groups, or sexually explicit stuff, but otherwise, let them find themselves.
I think kids will turn out as good as they possibly can when you give them room to explore expression, but within guidlines that won't let them get screwed up for life (drugs, pregnancy, jail, etc.). Hair color? Who cares, most will get over it by sophomore year in college.
Of all the freaks I hung out with in high school, there are plenty of examples of A students who dressed all conservative, now in rehab, and can't even make rent in a tiny apartment...AND there are the freaks who had 20 piercings who own successful businesses and today dye the grey out of their hair instead of putting purple in.
I don't know the answer, but the more we try to control the little habits of kids and people, the more we go toward a society that I really don't want to live in.