The problem with this proposal is that felons who've say been convicted of murder could keep on murdering while under this community service system. The point of the prison system is to lock up those who damage the structure of society by committing crimes.

This would also be less efficient than the prison system because you would have to have monitors to make sure the community service is being carried out. You could argue that it would create new jobs and boost the economy, but there would be a deficit with the jobs being lost to the collapse of the prison system (if this community/fine system was fully embraced) versus the jobs created.