Panopticon was first used by Jeremy Bentham as an architectual model in designing a prison. The concept follows that you could save money by building a circular prison with a singular tower in the middle for the guard. By keeping the guard in the dark and all the prisoners in the light, those being guarded could not tell when they were being watched. In this way, rather than a direct form of control, the prisoners (read citizens) internalize the belief that they could be watched and therefore regulate themselves. The prisoners/citizens internalize the desires of the guard/government/ruling class rather than just do what they are told ... very effective.
The system also works on a subconsious level to internalize the values of a particular discourse or hegemony, taking cultural views and creating a consiousness. Women internalize the values of patriarchy because of the posessive male culture. Children internalize their parents negative reinforcement in order to act out. People fear opposing opinions of themselves, because they have no sense of self.