Any economic system needs to make decisions regarding the allocation of scarce resources or inputs and maximize the output accordingly. Apart from that the decision to distribute the output among competing sections of society needs to be determined. In this context, the different economic systems like capitalism (pure market economy), communism (pure command economy) and socialism (mixed economy) adopt different mechanisms for the same. The classic question of economics is the “guns vs. butter” conundrum. This translates into how much of each to produce the benefits of the same.
For instance, in capitalism, it is left to the market to determine who gets what and how much is produced and distributed. The premise of capitalism is the “market knows best” when it comes to determining these decisions and the “hidden hand” of the market is supposed to guide the decisions and restore equilibrium and balance.
Communism works on the principle that state ownership of resources and methods of production is essential for the benefit of the common good. Thus, the decisions regarding the inputs and outputs and distribution mechanisms are made centrally and percolated down. This is also referred to as a “command and control” economy. The means of ownership is communal and profits for private individuals are absent and everyone gets paid uniformly.
In Socialist societies, the state arrogates some parts of the allocation of resources decisions and leaves the others for private players. The rationale behind this is that there are some critical sectors like defense and production of essential goods that need state intervention for the benefit of the common good.
Sources
Dornbusch, Rudiger, & Fischer, Stanley (2004). Macroeconomics (p. 157, 558). New York: McGraw-Hill.