As far as stressing extremes, Keynesian economics pushed for a"happy medium" where output and prices are constant, and there is no surplus in supply, but also no deficit. Supply Side economics emphasized the supply of goods and services. Supply Side economics supports higher taxes and less government spending to help economy.

John Maynard Keynes wrote The General Theory of Employment, Interest Rates and Money in 1936 as a response to high rates of unemployment in Britain in the wake of the Depression. His main thesis was that full employment could only be reached with the aid of government spending. He advocated active government management of the economy as a key responsibility of government to counteract the peaks and troughs of the business cycle.

In hindsight Keynes’ theories amount to little more than a well-argued case for government intervention. What in other parts of the world at the time was being called socialism or communism. That these theories and the thoughts of his followers and admirers were so readily adopted by western governments did not enhance the cause of liberalism in any way. Effectively the post war western world adopted as dogma a theory that - just like their adversaries in the communist world - expounded the virtues of central planning and government control, the exact antithesis of the liberal democratic tradition they were trying to defend and preserve.
We saw the development of the modern welfare state based around Keynesian thought that the sum total of a society is greater than the individual parts that comprise it (Keynes’ concept of moral risk). Government intervention in economic affairs increased significantly in the post war years as governments sought to control the business cycle to remove booms and recessions.

The ability of governments to do this was of course a dubious economic theory. But coupled with political reality it became a recipe for fiscal disaster. Keynes advocated higher spending at times of lower economic activity (often called pump priming). A government were keen to do this but of course political reality makes spending cuts unpopular and therefore unlikely. So the twin result of such policies was increasing government debt and higher taxes which stifle economic activity. The obvious outcome of such policies is higher inflation.

Keynes took little heed of the consequences of inflation and dismissed it from his General Theory. The onset of stagflation (high unemployment and high inflation at the same time) in the 1970s was a result of many years of accumulation of government debt, steadily increasing taxation rates. The oil crisis was simply a trigger rather than a cause that proved the impotence of post Keynesian thought to provide effective solutions to economic crisis. This led to the first real questioning of the Keynesian orthodoxy in policy making circles, even though it had been challenged and arguably defeated in academic circles for decades.

Hayek continued to refine his arguments in favour of a free, liberal, democratic society and his seminal work is the 1944 classic The Road to Serfdom. In this book Hayek dismissed socialism as leading to dictatorship and that planning and direction of an economy will inevitably lead to the suppression of freedom. Again we see that Hayek linked economics with freedom and he proposed a different road to the socialists, one based on individualism and classical liberal thought.

By the late 1970s Keynesianism was seen to have been a failure and the western world had been plunged into a spiral of inflation, unemployment and debt – just as Hayek had predicted would be the inevitable outcome of such socialist policies.

Liberal economists such as Milton Friedman at the University of Chicago had continued to promote and advance liberal economic thinking and with the arrival of the Margaret Thatcher government in Britain in 1979 and the Ronald Reagan administration in the United States in 1980 we saw a reversal of the trend towards centralist economic policy.

The Reagan and Thatcher administrations were littered with people who had embraced Hayek’s liberal economic agenda and they began implementing liberal economic reforms such as lower taxation rates, privatisation of government monopolies and a reversal of the trend towards central economic planning and control.

Today, neo-Keynesianism has returned to prominence. At the heart of this updated version is the theory that people are not perfectly rational, but nearly rational. That is, they do not carefully weigh the unemployment rate, inflation rate and monetary policy before deciding to cut their monthly prices by, say, $24.13. Instead, people have only a fuzzy idea of where their prices should be, and make their best guesses. But because people are self-interested animals, they tend to err in their own favor, underestimating how much they really need to cut. This results in a long lag between the recognition of a recession and the decision to cut prices in earnest. In fact, the lag is so long that discretionary monetary policy is warranted in cutting the recession short.

But won't a businessman's rational expectations negate the Fed's actions? The answer, it turns out, is not completely. The Fed's decision to expand the money supply in 1982 was widely debated and highly publicized. Yet businessmen generally did not compensate for the Fed's announced moves by raising their prices. There are many reasons: a large percentage of businessmen could still be expected to remain unaware of the Fed's actions, or what they mean. For many, raising prices incurs certain costs (reprinting, recalculating, reprogramming, etc., not to mention a dip in business) that eat into the increases and may not make them worth it. And even if they do deem the price hikes worth it, it takes many companies quite some time to put them into effect. (Sears, for example, has to reprint and remail all its catalogues.) Also, remember that the impulse to raise prices cancels out the impulse to lower them, which is also how Lucas believed markets cured recessions. Others may be engaged in price wars with their competitors. So, for these and other reasons, expanding the money supply still results in job-creation, despite the counter-effect of rational expectations.