Chief Justice Warren E. Burger yesterday proposed turning America's prisons into "factories with fences" where inmates work, get paid and contribute to their room and board.

In a speech at the University of Nebraska in Lincoln, Burger said that as a matter of "compassion" and as "a hard matter of our own protection," it must be acknowledged that the old approach to prisons has failed to control crime or rehabilitate criminals, and the new approach, construction of even more facilities, promises nothing better.

"The reality is that if we are to fulfill one of the most fundamental obligations of government--the protection of people and homes--there must be both more effective law enforcement and a drastic change in our prison systems," he said. "Just more stone, more steel for walls and bars will not solve or even improve these dismal conditions."

Burger's speech on prison reform continues a theme pursued off the bench by the chief justice for several years. It comes when both states and the federal government are discussing massive increases in spending for prison construction as a way of dealing with crime.

The chief justice suggested that inmates could produce products ranging from ballpoint pens and automobile parts to lawnmowers, just as they would if working in a private factory. "Then pay that person some reasonable compensation and charge something for room and board and keep and we will have a better chance to release from prison a person able to secure gainful employment," he said. "Added to that, it will be a person whose self-esteem will at least have been improved to a level where there is a better chance of living a normal life."

Burger said his plan would require repeal of laws in many states which limit prison production, and would require a change in the attitudes of business and organized labor that fear subsidized competition.

Acknowledging that prison production programs would "compete to some extent with the private sector," Burger said, "I cannot believe that this great country of ours, the most voracious consumer society in the world, could not absorb the production of even as many as 100,000 prisoners, hardly a drop in the bucket in terms of the gross national product."

In addition to aiding rehabilitation, Burger said the program would save tax money by having the inmates bear some of the financial burden of their incarceration.

"There are no guarantees of success," he said. "But the course we have been following has not produced what we hoped. On the contrary, the situation grows worse."