A capitalist free-market economy approaches the problem of working of the economic system from consumers’ choices, via market prices, to production processes guided by these prices.
A socialist planned economy, on the contrary, starts from planned aims, via ex-ante integration of the factors, to results which consumers have to accept.
Prices, under socialism, are the tools in the hands of planners; they are fixed directly by planning authority and not by the market forces.
Thus, prices, in such an economy, do not have allocative role, i.e., they do not determine how much to produce or how to allocate the resources in different uses.
The mode of operation of the socialist system indicates that price mechanism and money has no role to play in such an economy. Money appears to be a superficial concept in an economy where all activities are planned, implemented and regulated by the state.
But such a belief has been disproved by the experience of the socialist economies like U.S.S.R., Yugoslavia, Poland, etc., where the pricing process and hence money fulfils many important functions.
The basic difference is that while in capitalism money is a master, in socialism it acts as a servant.
According to Halm,”Even if the aims of production should be determined by a dictator allocation of resources according to these aims would have to be the result of the working of pricing process by means of which it is possible to compare the usefulness of the available resources in different fields of employment.”