The main objective of this essay is to show that the process of transition from socialism to capitalism in Central and Eastern Europe is a cultural problem rather than a technical one. In pursuing that objective I analyze two interrelated issues. First, analysis shows why and how cultural differences in Central and Eastern Europe have, via transaction costs specific to the process of transition, specific and predictable effects on the results of institutional restructuring, and, consequently, on economic performance. Second, I argue that spontaneous changes in the prevailing culture could, under a set of credible and stable formal rules of the game, help to close a gap between the culture supportive of capitalism and the prevailing culture in Central and Eastern Europe.My colleague and friend Fred Fransen made two major contributions to this essay: he helped me identify numerous inconsistencies in the essay, and he changed a number of my perceptions on the relationship between culture and economic performance. James Buchanan, Ljubo Madzar, Henry Manne, Milic Milovanovic, and Katarina Ott gave me useful suggestions and comments on earlier drafts. I am grateful to Victor Vanberg and Ulrich Witt for the opportunity to discuss this essay with their colleagues and students at the University of Freiburg and Max Planck Institute in Jena, Germany.