Tim Keller has referred to legalism and liberalism as "the two thieves" of the Gospel. A legalist may be a person who possesses truth without grace. A liberal may be a person who possesses grace without truth. Of course, both approaches compromise the freedom that believers should have in Christ. Keller writes:
Those with truth without grace, do not really have the truth, and those with grace without truth, do not really have grace. In Jesus we behold the glory of the one "full of grace and truth." De-emphasize or lose one or the other of these truths, you fall somewhat into legalism or somewhat into license and you eliminate the joy and the "release" of the gospel. Without a knowledge of our extreme sin, the payment of the gospel seems trivial and does not electrify or transform. But without a knowledge of Christ's completely satisfying life and death, the knowledge of sin would crush us or move us to deny and repress it. Take away either the knowledge of sin or the knowledge of grace and people's lives are not changed1.
Legalism involves a focus on rules, all of which tend to put man under law and not grace. Liberalism involves a focus on rule-makers, all of whom may tend to establish a righteousness of their own without submitting to God's sovereignty and righteousness (Romans 10:3). The solutions is to focus on a Gospel-centric understanding of Christ and culture that is guided by spirit (2 Corinthians 3:17) and truth (John 8:32). Then we have freedom in Christ (Galatians 5:1).
Focusing on Christ as the fulfillment of the law makes us aware of our extreme sin but we see how Christ sets us free from the penalty of sin. Focusing on Christ's grace gives us freedom to be ourselves while still upholding law (Romans 3:31) that is not burdensome (1 John 5:3). Distort the knowledge of sin or the knowledge of grace and people do not appreciate the freedom we have in Christ.
A proper understanding of Christian freedom helps us understand Christ and culture. We can guard against the legalism of rules while also avoiding the liberalism of rule-makers who seek to give dominion (and license) to themselves rather than to God. This is explained in the following links, which are based on H. Richard Niebuhr's classic book, Christ and Culture.
[A] Philippians 3:4-11 and Isaiah 64:6 remind us that works are but "filthy rags." The law now points us to Christ (Galatians 3:24) who obeys the law perfectly on our behalf (Romans 5:18-19) and who encourages us to obey from the heart the pattern of teaching introduced by Christ (Romans 6:17)
[B] Teachings of Augustine, Calvin and other Reformed thinkers are applied to encourage freedom to apply Christian principles and practices. The freedom is guided by spirit (2 Corinthians 3:17) and truth (John 8:32, Galatians 5:1).
[C] Liberalism may be linked with Antinomianism. John MacArthur writes, "Antinomianism radically separates justification and sanctification making practical holiness elective."