In his speech to the Conservative Party conference, Mr Clarke said jails should be "places of retribution but also places of reform".
Mr Clarke said he was "dramatically" expanding the working prisons programme and welcomed the support of eight major companies, including Virgin and Marks & Spencer.
The Justice Secretary, who has faced claims he is soft on crime, told the gathering in Manchester: "At Altcourse Prison near Liverpool, prisoners do 40 hours of hard work every week in a metal workshop.
"Part of their earnings goes to fund services for victims of crime and because these prisoners have got some skills, they are less likely - a lot less likely - to return to prison.
"So the burden on the taxpayer, on you and me, is less.
"I am in the process of expanding this working prisons programme quite dramatically.
"It's is not something Government can do alone, we need the private sector, socially responsible private partners, on board."
High-profile business leaders including Sir Richard Branson and Marks & Spencer boss Marc Bolland called for more criminals to be given jobs in a bid to harness the talents of "potential superstars" in the prison population in a joint letter to the Financial Times.
Among the other signatories are Matthew Davies of Pets at Home, Steve Holliday of National Grid, Ian Sarson of Compass Group, James Reed of Reed Specialist Recruitment, Malcolm Walker of Iceland Foods and James Timpson from the family key cutting and shoe repair empire.
Mr Clarke said: "The idea is to provide hard work in prison so that prisoners would be doing something productive, instead of doing nothing.
"Plotting a more honest future instead of planning their next crime, earning money to pay back to victims instead of dreaming of creating new victims through future crimes."
Mr Clarke repeated his claim that a "feral underclass" was responsible for the rioting that spread through English cities this summer.
He told the conference: "More than 75%, more than three quarters, of the adults who were charged were repeat offenders who had been through our present system.
"One in four of them had been convicted of 10 crimes or more already. They were re-offenders, career criminals."
He added: "In my opinion our feral underclass in this country is too big, it has been growing, and now needs to be diminished.
"If you are striving to have less crime in this country you need fewer criminals. So the question for me and my ministry now is how do we reform the criminal justice system so that these unreformed, recidivist criminals, are dealt with more effectively and at less cost to the taxpayer.
"That is why we need prisons that work and we also need prisons that are drug free."
Mr Clarke said: "I think more than half of criminality we have today is caused by the drugs problem that did not exist a few decades ago.
"In prison, problems like addiction, problems like mental health have got to be tackled properly and the treatment for drugs doesn't suddenly stop when the prisoners leave jail, which usually happens certainly with those who are only in prison on short sentences.
"The treatment, getting them off the drugs, has got to continue in the outside world so that we are all better protected.
"If we want less crime, we need fewer criminals."
Mr Clarke said a payment by results system for prisons had been "carefully but quite rapidly" developed to reward cuts in reoffending.
Mike Cherry, policy chairman at the Federation of Small Businesses, backed Mr Clarke's working prisons idea but said that it should be open to local firms.
He said: "The FSB welcomes any initiative that assists ex-offenders and prisoners on day release back into the workforce. However, it is absolutely essential that small businesses are at the heart of any Government scheme.
"Small firms operate at the heart of local communities and offer a more informal and intimate environment where ex-offenders can more easily integrate into the community and go on to lead fulfilling and productive lives."
The biggest round of applause for Mr Clarke was when he said the Government planned to criminalise squatting.
Ministers have been urged not to press ahead with the plan after a report found it would lead to an increase in some of the most vulnerable homeless people sleeping rough.
The report, published by Sheffield Hallam University on behalf of homeless charity Crisis, said the new laws would result in the criminalisation of homeless people, who squat because accessing adequate affordable housing in England and Wales is so difficult, but would have little impact on levels of squatting.
Shadow justice secretary Sadiq Khan said: "Given that the Government is struggling to create jobs outside of prisons, how on earth are they proposing to create them in prisons?
"It is critical that jobs are not taken away from the law-abiding majority and that Ken Clarke explains how he will provide the resources required to supervise one in four prisoners spending greater amounts of time outside of their cells.
"This is particularly acute when the Ministry of Justice budget is being cut by 23%, with thousands of frontline prison and probation officers losing their jobs.
"Ken Clarke failed to explain to the public how he intends to reduce crime, make our communities safer and keep prisons secure. He demonstrated that he is out of touch with the needs of the British public."
PA
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