Foucault, Michel. "The Eye of Power" in C. Gordon, ed. Power/Knowledge: Selected Interviews and Other Writings 1972-1977. New York: Pantheon, 1980: 146-165.
Images of the Panopticon, also here.
This conversation (with Jean-Pierre Barou and Michelle Perrot) is an excellent discussion of Foucault's notion of the Panopticon. Foucault's comments are not indented; those of the other two are indented.
It was while I was studying the origins of clinical medicine. ... I wanted to find out how the medical gaze was institutionalized, how it was effectively inscribed in social space, how the new form of the hospital was at once the effect and the support of a new type of gaze. In examining the series of different architectural projects which followed the second fire at the Hotel-Dieu in 1772, I noticed how the whole problem of the visibility of bodies, individuals and things, under a system of centralised observation, was one of their most constant directing principles. In the case of hospitals this general problem involved a further difficulty: it was necessary to avoid undue contact, contagion, physical proximity and overcrowding, while at the same time ensuring ventilation and circulation of air, at once dividing space up and keeping it open, ensuring a surveillance which would be both global and individualising while at the same time carefully separating the individuals under observation. For some time I thought all these problems were specific to eighteenth-century medicine and its beliefs.
Then while studying the problems of the penal system I noticed that all the great projects for re-organising the prisons...take up this same theme, but accompanied this time by an almost invariable reference to Bentham. There was scarcely a text or a proposal about the prisons which didn't mention Bentham's "device" - the "Panopticon"
The principle was this. A perimeter building in the form of a ring. At the centre of this, a tower, pierced by large windows opening on to the inner face of the ring. The outer building is divided into cells each of which traverses the whole thickness of the building. These cells have two windows, one opening on to the inside, facing the windows of the central tower, the other, outer one allowing daylight to pass through the whole cell. All that is then needed is to put an overseer in teh tower and place in each of the cells a lunatic, a patient, a convict, a worker or a schoolboy. The back lighting enables one to pick out from teh central tower the little captive silhouettes in the ring of cells. In short, the principle of the dungeon is reversed; daylight and the overseer's gaze capture the inmate more effectively than darkness, which afforded after all a sort of protection.
The very word "Panopticon" seems crucial here, as designating the principle of a system. Thus Bentham didn't merely solve a specific problem, such as that of a prison, a school or a hospital. He proclaimed it as a veritable discovery, saying of it himself that it was "Christopher Columbus' egg". And indeed what Bentham proposed to the doctors, penologists, industrialists and educators was just what they had been looking for. He invented a technology of power designed to solve the problems of surveillance. One important point should be noted: Bentham thought and said that his optical system was the great innovation needed for the easy and effective exercise of power. It has in fact been widely employed since the end of the eighteenth century. But the procedures of power that are at work in modern societies are much more numerous, diverse and rich.