In concept, it's simple: Identify the conditions that lead people into anti-social behaviors, and change those conditions to encourage pro-social behavior instead. That way, not only do we avoid having to incarcerate people, we don't have victims anymore. This may sound abstract and hand-wavey, so as a concrete example, crime is way, way down compared to the 1970's, and it seems to have a lot to do with eliminating leaded gasoline, and allowing abortion. A concerted effort to reduce poverty would go a long way to reducing crime rates even further.

Social influence (culture, social norms, peer pressure, etc.) is the most effective way to keep people in line. Laws do diddly-squat. Most people respond to their life conditions and surroundings, including what people even think of as crime. For a good example, instead of jaywalking, consider speeding. It's against the law, but socially promoted, so virtually all drivers do it even though it's against the law. Or, consider a "law-and-order conservative" business owner whose social circle wants to see the heads of the local panhandlers cracked, but happily engages in wage theft from his employees, and whose pastor at church is diddling kids. Simply put, the better alternative to prison is to create and put people in social environments that don't tolerate crime in the first place.

Even people who don't respond to social influence, the sociopaths, can be handled more productively. They still have motivations and needs that, while disconnected from empathy, still guide their behavior. They're still essentially rational people, too. There's a program here at the Mendota Mental Health Institute that works to rehabilitate sociopathic people who've landed in the criminal justice system. They've had good success by identifying what these young men want, and explaining/demonstrating to them (i.e. through their rational faculties) that they can get what they want long-term by learning and following society's rules. I know a guy who is/was deficient in empathy, and landed in jail, where his therapists helped him exercise and develop his empathy. Smart dude, and now he's got a productive job where he's invaluable to the company. The concept is again deceptively simple: As an intelligent man, he learned to consciously ask himself, how would I feel if my actions were instead applied to me? He uses the Golden Rule, essentially.

Let me flip this around and ask why do we consider prison as an appropriate way to "deal" with murderers, rapists, and child predators? I would point out that the United States has a huge prison population, and murderers, rapists, and child predators. If the threat of prison were an effective deterrent, why is that? (To unload the question, I'll say that I believe that we practice incarceration as a morality play by which we re-assure ourselves that we are good people compared to the criminal scum. It has nothing whatsoever to do with concern for victims.)