A broad neuron-centric conception of contextual modulation is reviewed and re-assessed in the light of recent neurobiological studies of amplification, suppression, and synchronization. Behavioural and computational studies of perceptual and higher cognitive functions that depend on these processes are outlined, and evidence that those functions and their neuronal mechanisms are impaired in schizophrenia is summarized. Finally, we compare and assess the long-term biological functions of contextual modulation at the level of computational theory as formalized by the theories of coherent infomax and free energy reduction. We conclude that those theories, together with the many empirical findings reviewed, show how contextual modulation at the neuronal level enables the cortex to flexibly adapt the use of its knowledge to current circumstances by amplifying and grouping relevant activities and by suppressing irrelevant activities.