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State policy leaders now faceor soon will encountercritical decisions about their colleges and universities for two reasons: First, the success of American colleges and universities over the last half-century has given rise to high societal expectations. Second, unprecedented challenges to higher education are emerging from substantial demographic, technological, economic, and organizational transformations in our society. In this context, the paper aims to trace and summarize the complexity of general patterns in higher education governance, to describe the structural relationships that deeply affect institutional efficacy, and therefore must inform higher educational policy decisions. The authors claim that state policy strikes a balancesometimes explicitly, sometimes by defaultbetween the influence of the market (defined broadly as forces external to state government and higher education) and the influence of systems or institutions of higher education. An effective balance within and across three policy levelsthe macro state policy environment, system design, and practical work processes promotes the general welfare. The goal of state policy, then, is to exercise state authority to achieve public priorities by balancing, within and across complex policy levels, the influence of academic institutions and the influence of the market, broadly defined. ; The National Center for Public Policy and Higher Education