I am new to Foucault and was studying his essays on Discipline and Punish, I was however uncertain whether or not he is taking a specific position in this regard. Is the "pan-optical" method of observation his proposal for overcoming crime? Or is he simply a genealogist, laying out historical facts?
His intention is not to lay out a method for criminology (if anything he views the panopticon as highly oppressive) but rather to examine the genealogy of the penal system to better understand how power relates to knowledge.
A major trend which emerges from the minutiae of his impressively detailed study is that public, violent displays of state power were ultimately less effective than the prison system at achieving their goal of the control of subjects. Publicly torturing or executing prisoners, as was common before the Enlightenment in Europe, created a spectacle of state power which was external, and thus just as likely to intimidate its witnesses as it was to give them a rallying point in channeling their anger against the force of the state. Foucault cites the example of public executions which were broken up when the assembled crowd became a mob driving away the executioner and other state officials.
On the other hand, a prison system functions by controlling a population through observation. A person's movements are micromanaged, and if they break their routine they are punished. the possible absence of an external witness (the panopticon is set up so that a guard may be watching the prisoners at any time, but he is invisible to them), means that the authority of the state is internalized, and the subject begins to "police" his own actions. This is a logic which is not limited to prisons, but employed in schools, factories, barracks, and society at large. It is how social normativity functions in general.
Part of Foucault's goal in exploring this transition is to undermine the progressivist narrative of the Enlightenment. That common story claims that the Enlightenment was driven by humanism to create a more just society where the rights and human dignity of formerly marginalized or mistreated people (and sometimes animals) were recognized. Foucault claims on the contrary that the transition which occurred was motivated by and accomplished a heightening of state power and the oppression of its subjects by causing them to internalize the state authority.