As there is an increasing perception of the importance of knowledge creation and distribution for economic prosperity, what kind of role should universities play? Which public policies are more effective in promoting this role? These are the fundamental questions this article addresses. The objective is to understand the expectations for the universities in developed countries under a public policy perspective. More specifically, we discuss public policies that can promote, and those that can hinder, a positive and cumulative role of universities in the knowledge-based economies. The article systematizes the economic relevance of knowledge using recent advancements in the so-called new growth theories. Some empirical manifestations of the increasing importance of knowledge are analyzed. We briefly discuss the mission of the university as it is almost universally perceived today. Universities have been viewed as producers of new codified knowledge through research and as providers of human capital through high level education. The evolutionary trend of these functions, in which the university's research importance to promote the learning ability of graduates has been enhanced, is discussed within the context of the knowledge-based societies. The analysis is presented in terms of the impact that public policy, and especially public funding, may have in fostering or hindering the positive contribution of universities for economic prosperity. The fundamental criterion, we argue, is the preservation of the institutional integrity of the university.