The C64 did not ship with an assembler program, but you could write your own in BASIC if you wanted to, so yes, you could start from "scratch"

Commecial development has been for sure be done with Macro Assemblers, and compilers for programming languages like PASCAL. If I remember right there was an BASIC compiler available that gives good results. Mainly the assemblers and compilers are split into parts and loaded in background from a disk (160kb single sided 5 1/4 inches), wenn needed.
Think of the memory constraints that you have on a C64. Even if you turned off the BASIC ROM you allways had less than 64kB for your program and data.

Writing an assembler program and translating it by hand was only a time consuming thing. If you have done this some time you know the instruction codes by value and it was easy to read and write them. Reading could be interesting if you had some assembler code and wants to know what they do in there (reverse engineering). It was easy.

Accessing the hardware was even easy, because you had no restrictions while accessing. The hardware registers where all memory mapped. So you only needed to know the address and then you could manipulate the functions of the hardware at will.

Funny time

I reckon the first few years of the C64's life games were written on the C64 itself, but then written on a more powerful machine in its later years such as the Commodore Amiga. Just a guess though...

I don't know if it happened on machines such as the c64 but I do know that at some point amiga games were developed using cross assemblers and debuggers running on intel PCs.

I know that reflections did this at least on shadow of the beast II and later games (they used to have interesting blurbs in the documentation of their games telling about the developpment process and it was mentioned there iirc).
Factor 5 had even developped their own intel pc based toolset called "pegasus" that they used for all their amiga and console games (probably even for their atari ports too)., I had read this in an interview somewhere.

Nowadays it doesn't makes a lot of sense to use another pc to develop a pc game, but in those days it probably made a lot of sense for professional developers to turn to that kind of solutions because machines had small amounts of memory which made it hard to have a game and development tools to coexist and even though some OSes like amiga's had preemptive multitasking they didn't provide any kind of memory protection and process isolation, which meant any unfortunate write through a bad pointer could bring the entire system down (or worse, result in filesystem or text editor buffer corruption, all kind of fun things).

Also since most games just clobbered the entire hardware and memory and interruption handlers (because using the os induced too much overhead and the hardware was fixed anyway) it was likely much easier to use remote debuggers running on the intel pc than having some hacks to let the game coexist peacefully with the os during development.

As an example of the kind of things that could happen in those days when developing directly on actual target machine , the first game that Reflections developped on amiga was ballistix. I can't remember how the hell I managed to come accross that in the first place but there were actual portions of the game's assembler source code that ended up lying around on some unused sectors of the floppy disk. Evidently that game wasn't yet using a development process using a separate pc...

So I guess that the Commodore 64 was used to make games for itself

What language did they use for them(And by the way, I'm talking those actual commercial games and software for the C64)
because I know you can program in basic straight from the the thing, but did commercial games use assembly?

Mostly (6502) assembly language. This is a good read:
http://bryanpendleto...e-after-25.html
http://jordanmechner...ersia-released/