Barry Hindess. Discourses of power: from Hobbes to Foucault. Oxford: Blackwell, 1996.
Foucault maintains that . . . there is a certain continuity between the government of oneself, the government of a household [oeconomy] and the government of a state or community. Linked to this continuity, he argues, is the fact that the principles of political action and those of personal conduct can be seen as being intimately related. He suggests, for example, that successful government of others depends, in the first instance, on the capacity of those doing the governing to govern themselves. As for the governed, to the extent that it avoids the extremes of domination, their government must aim to affect their conduct - that is, it must operate through their capacity to regulate their own behaviour. In this respect too, successful government of others is often thought to depend on the ability of those others to govern themselves, and it must therefore aim to secure the conditions under which they are enabled to do so. 
[W]hat matters in the study of governmental power [from the perspective of government as the regulation of conduct] is not so much the state itself, considered as a more or less unified set of instrumentalities, but rather the broader strategies of government within which the instrumentalities of the state are incorporated and deployed. 
For Hindess there is also another more specific and precise form of Foucault's use of the term government: "'the particular form of governing which can be applied to the state as a whole.'" [Foucault cite. 109]
Government, in this specific sense, is not to be confused with the rule of the prince, feudal magnate or emperor, or even with the collective rule over themselves that is often said to have been excercised by citizens of the independent Greek communities and of the Roman republic. 
The government is based on intrinsic rational principles- reason of state - and has as its main object population. Population has 'its own regularities, its own rate of deaths and diseases, its cycles of scarcity, etc' [and it emerged due to an understanding of it] as characterized by its own aggregate phenomena, irreducible to those of the families contained within it. [Foucault cite. 111]
Population "comes to appear as above all else as the ultimate end of government. In constrast to sovereignty, government has as its purpose not the act of government itself, but the welfare of the population, the improvement of its condition, the increase of its wealth, longevity, health, etc.; and the means that the government uses to attain those ends are themselves all in some sense immanent to the population. [Foucault cite. 111-2]
3 'approaches to the general problem of government: discipline, pastoral power, liberalism.' 
3 rationalities of government.
'A productive power par excellence: it aims not only to constrain those over whom it is exercised, but also to enhance and make use of their capacities.'
The idea that the conduct of others (and of oneself) can be subjected to instrumental control is clearly predicated on an orientation which Heidegger describes as 'the essence of technology'. This orientation treats the world as consisting essentially of forces that can be harnessed, at least in principle, to human purposes. Human individuals and human aggregates, too, will thus be seen, like all other phenomena, as if they were a standing reserve of energy to be put to use. But before this can happen, what it is that will be used in this way - what Heidegger refers to as 'a calculable coherence of forces' - must first be defined and identified. For this reason, Foucault insists that the expansion of discipline in this period goes hand-in-hand with the invention of the humanist subject; that is, of the conception of the human individual as endowned with a soul, consciousness, guilt, remorse, and other features of an interiority that can be worked on by other agents. This humanist subject came to be seen as the locus of usable energy and, therefore, as the focus of instrumental control: the focus, in other words, of discipline. 
Such discipline requires techniques of knowledge about and concerning the human subject. Thus discipline is knowledge/power. Techniques of disciplinary power include: surveillance, regimentation, classification. 
2. Pastoral Power (Shepherd-flock game): police, confession, guidance and self-examination
a more continuous and more intimate form of government than consensual ones: "to promote the well-being of its [a government's] subjects by means of detailed and comprehensive regulation of their behaviour. [. . . ] Pastoral power . . . is concerned more with the welfare of its subjects than with their liberty." 
Three facets of pastoral power: i. "Shepherd governs a flock and each of its member, rather than a territory and each of its inhabitants. [ . . . ii] the flock exists in and through the activity of the shepherd: remove the shepherd and the flock is likely to collapse into a mass of dispersed individuals. [ . . . iii] the shepherd cares for the flock both individually and collectively, attending to the needs of its members." 
Hindess summarizes Foucault's reach into older meanings of 'police': It referred both to an area of government administration - covering everything apart from justice, finance, the army and diplomacy - and to the objectives of that administration. In effect, police was responsible for the comprehensive regulation of social life in the interests and development of society and the improvement of individuals, and it was expected to pursue these objectives in the most rational fashion . . ."a good national 'police' was not to be achieved solely by politicians or by a professional corp of 'police', but by publicly concerned, philanthropically minded citizens." [Andrews cite. 120-121]
"The theory of police exemplifies the comprehensive responsibility for the welfare of the flock and each of its members that is central to Foucault's account of the 'pastoral' rationality of government." 
The early [Christian] church developed models of pastoral power which were later adapted by 17c 'Confessional' states in Europe.
"[T]he 'pastoral' ise of confession, self-examination and guidance continue to be found today, not only in Christian churches and sects, but also in the work of a variety of specialized state agencies and private charitable and philanthropic organizations, in may kinds of counselling, therapy and techniques of personality modification . . . In such cases, the training of individuals in the exercise of self-government serves as an instrument of the government of their conduct. . . . [T]he 'pastoral' use of confession, self-exmaination and guidance of conduct should be seen as instruments of government that work in part through the formation of individuals who can normally be relied upon to impose an appropriate rule on their own behaviour.[122-3]
3. Liberty and the Liberal Rationality of Government
From one, orthodox, perspective "[t]he fundamental problem of liberal government . . . is to build the appropriate restraints into a system of government that nevertheless remains sufficiently powerful to secure the liberty of its subjects." 
Foucault's very different perspective on Liberal rationality begins from his tenets that wherever power is freedom (to some extent) is always already there, and that governmental power works through the behaviour [conduct] of free persons. For Foucault the fundamental rationality of Liberal government is that it should promote the freedom of its subjects rather than see such freedoms as threats to its governing. Thus Liberal government seeks to secure what it considers as natural conditions for the generation of this freedom; security of markets-economy, population growth. At the heart of liberalism, in this view, is an interventionist state. [124-5]
Two Liberal critiques of police:
I. "the comprehensiveness of police attempts at regulation - the fact that they are aimed at the entire population - must be rejected on the grounds that the primary objective of the state should be the defence of individual liberty not the pursuit of happiness." 
II. Foucault's analysis of liberal critique of police focuses through something similar to Adam Smith's critique in which police=regulation=dependency=conditions for degeneration. cf "nanny state" critiques in which welfare is seen to blunt self-reliance, independence and moral improvement. Here the market comes shining through as that self-regulating and 'natural' realm, or sphere, in which these attributes can best be generated in a condition which is 'state-free'.
So, "[i]n Foucault's terms, then, the liberal rationality of government regards the liberty of its subjects as an indispensable element of government itself." 
Governing through a freedom that is regulated indirectly: through the formation of selves that is the aim of education. Or the formation of selves that occurs through enculturation, or what in German is called Bildung: often the first term in the literary genre class the Bildungsroman, or the formation or coming-of-age novel.
One research problem in my thesis is this: if neo-liberalism, a newer form of governmental rationality best summed up in the texts of the Chicago School political-economic intellectual Milton Friedman, becomes ascendant over the long Labor decade then how does its regulation through formation of selves appear in Australian literary fiction and in Australian Labor party discourse? In other words, is there an Australian inflection to the Bildungs of neoliberalism? Some previous thoughts here.