It's a bit of the best of times and the worst of times, as the best installment for Harvey on the show is delivered in a police procedural format never to be referenced again.
This is more-or-less the second "vigilante" episode of Gotham. While we are clearly meant to see the psychiatrist as a crazy villain, she does at least have some twisted sort of "motive" for her actions, arguing that the murders of the city's elite are "therapeutic" for its citizens.
In fact, as a murder mystery this episode isn't all too shabby. It's got the added benefit of ripping up some old wounds for Harvey and showing him back in a time where he was as "idealistic and naïve" as Jim, with a partner as jaded as him, all leading up to his friend getting crippled because of him. "Gotham's golden rule, Harvey. No heroes." Obviously, Harvey isn't too keen on the prospect of history repeating itself.
The proceedings of the episode have the two detectives worriedly contemplating the existence of the supernatural, although at the end it's all revealed as the machinations of a sadistic puppet master. It's also doing a fine job humanizing Harvey's character. The problem is that Dixon is a character we will never see again, and nothing of this will ever be talked about again, so ultimately Harvey's remorse over hurting his friend and surrogate father figure serves no purpose.
Bruce and Alfred are back in their ivory tower commenting on the revolutions of the world. As the serial killer is targeting Gotham's richest firstborn children, Alfred wants Bruce to get out of town, but with a signature fatalistic expression Bruce dismisses him, noting how "there's no-one to take me from" and crushing the hearts of our favorite butler and all the soft spots in the audience.
There's an ominous tone of depression about Bruce, where he doesn't really seem to care if he lives or dies as long as he's not wrapped up in his investigations. Oh, what could ever make him smile again, I wonder? The easy answer to that question would be the weird stalker girl later to be known as Catwoman, who breaks into the manor to steal a keepsake and get a good look at him. Gotham keeps building up to their first proper meeting and fans keep chewing their nails hoping they'll get it right.
The third current of the show is the Penguin's plotline; him returning to his mother after his rough patch, expanding on his vaguely incestuous connection to her, and later showing up at the police station. Consistently, as is the case through all of Gotham's early fare, his material is the most well-acted of the show, only rivaled by Cory's stellar work as Edward Nygma, his brilliant sparring with Harvey and his bizarre courtship of Kristen. "Kringle. Such a rare surname. Most people changed it generations ago, out of embarrassment. Not only did your parents keep it; they called you 'Kristen'. 'Kristen Kringle.' They must be very humorous people."
The installment is rounded up with Jim's hapless romance with Babs and the one noteworthy development of the episode. "Barbara... This city... The law, the crime here, they're all twisted up in each other like a maze. I came here to be a cop. This city needs something else." Too heavy-handed? After the last round of emotional blackmail, Jim is ready to cave in and spill his secrets; secrets that could get her, and more importantly other people killed. Meanwhile, Allen and Montoya finally find a witness to pin Ozzie's death on Jim Gordon, leading up to the climax with them arresting him and Oswald walking into the GCPD to exonerate him.
All in all, this is an episode packing a lot of threads. Despite the tons of material stuffed into it it's coming across as quite coherent. In retrospect it will only be remembered as "that episode where Jim got arrested", but really, judged separately it isn't a bad outing.