I’ve had the same understanding of James 2 for half a dozen years, dating back to numerous discussions with Roman Catholics on facebook, long before I became interested in epistemology. I don’t usually write posts on specific passages (for a related but more general post, see here), but in the aftermath of a discussion in the comment section of a recent post by Drake Shelton (link), I think it will be useful to explain why I think James 2 is not as problematic for Protestants as its perpetual use by many Roman Catholics for that purpose might indicate. The emphasis, however, will be to examine James 2 in light of the system of Reformed theology. This includes, for example, that good works necessarily follow from saving faith, that saving faith is [efficiently] caused by grace alone, that justification before God is by [the instrument of] faith alone, and, perhaps more contentiously, that saving faith is understanding and assent to the divinely revealed propositions referred to as the gospel. That is, if James 2 can be shown to be compatible with these, the latter two of which are usually disputed – especially sola fide – then it cannot be rejected due to alleged inconsistency with Pauline or [other] canonical books.
James 2:14 What good is it, my brothers and sisters, if someone claims to have faith but does not have works? Can this kind of faith save him?
15 If a brother or sister is poorly clothed and lacks daily food,
16 and one of you says to them, “Go in peace, keep warm and eat well,” but you do not give them what the body needs, what good is it?
17 So also faith, if it does not have works, is dead being by itself.
Obviously, a claim to faith does not necessarily mean one actually has faith. If, as Reformed theology states, saving faith necessarily yields good works, then a so-called faith which does not yield good works is a “faith” which does not save. As such, it is dead. This is not the faith of saints.
18 But someone will say, “You have faith and I have works.” Show me your faith without works and I will show you faith by my works.
19 You believe that God is one; well and good. Even the demons believe that—and tremble with fear.
These verses seem to set up an objection from an interlocutor, yet there is some question as to where James intends the quote to end, and this impacts the intended meaning. I think the following from the IVP New Testament Commentary Series succinctly summarizes the options and recommends the best interpretation (link):
An Anticipated Objection and Its Answer (2:18)
The objection that James anticipates presents a problem. We would expect him to propose the statements "You have deeds; I have faith" as a potential retort spoken to him; but what he writes is a reversal of these statements. Some have supposed a loss from the original text; but with no manuscript evidence to support it, this theory must remain a last resort. Others (e.g., Ropes 1916:208-14; Dibelius 1976:155-56; Laws 1980:123-24) have simply accepted James's reversal of these statements as a carelessness about how he formulates them; his primary point is to confront the false theology of separating faith and actions, regardless of which party holds which alternative. Such an explanation is possible but dangerous with any text; the first course must be to seek a reasonable explanation for a deliberately worded text. Laws, for example, admits the solution is not entirely satisfactory (1980:124). Mayor (1897:95-96) and Adamson (1976:124-25) try to solve the problem by extending the quotation through the end of 2:18 and rendering the whole verse not as an anticipated objection to 2:17 but as a further confirmation of it. This requires an understanding of will say in 2:18 as "someone may well say" and the rest of the verse as the person's argument, which James is commending to his readers.
A paraphrase of James's thought would then be: "Faith by itself is dead. In fact, someone could properly say, `You have faith, and I have deeds. Show me your faith apart from deeds, and I will show you my faith by deeds.' "This solution is possible grammatically and attractive because of the consistency it provides for James's use of the pronouns. However, it is too forced, not only because of the sense it requires of the verb will say but also because it attempts to reverse the whole first phrase (but someone will say), which in all other cases in Greek literature introduces a contrast or objection to what has preceded. Davids (1982:124) and Moo (1985:105-6) finally choose the solution accepted by Ropes, Dibelius and Laws as the most likely, acknowledging that all of the solutions to this passage have their difficulties. This does seem the best option.
In other words, James is not particular about whether any hypothetical questioner believes in faith alone or in deeds alone. Instead, James is repudiating any separation of faith and actions as if they were contradictory or even equal alternatives. He is insisting on the theological unity of the two. In 2:18 he challenges anyone to be able to claim genuine faith without the authenticating works, and he declares the only way to have genuine faith is to carry it out with deeds. He affirms the necessity of both faith and actions and says he will show the former by the latter.
In short, the following considerations outweigh the more abstract question of why the interlocutor says “You have faith and I have works” rather than “You have works and I have faith” – it is apparent in 2:20 that James does, in fact, have in mind someone who would object to 2:14-17. Given the connection between this objector in 2:18 and the remarks about a dead faith in the previous verses, it would be odd if it were the objector who challenged, “Show me your faith without works and I will show you faith by my works.” Now, if James were to have said this in response to an objector who is illegitimately dichotomizing faith from works (or vice versa), however, the point is clear: one’s claim to faith must be shown by the works he does.
This would also be the first indication that one intention of the author is to explain how faith can be evidenced to others [i.e. people, not God] (cf. 2:22, 24). An omniscient God does not need to see the necessary subsequent (good works) in order to know the claim to the related antecedent (saving faith) is true. For God can know our thoughts, not to mention that He Himself would have caused saving faith in the first place. We, on the other hand, in general (excluding divine revelation about particular individuals) neither have the privilege of knowing who God has decided to regenerate nor the internal mental activities of any other person, so all we have to go on is what we think we see others do outwardly, i.e. their works. That is the only means by which we can “show” another that our claim to faith is more than nominal.
Briefly, the question of how demons can be monotheists yet unsaved is answered simply: monotheism is not a sufficient condition for salvation. Belief in Christ is necessary. Because 2:19 clearly does not imply the monotheists in question possess saving faith – and, therefore, much less that they do good works – it can’t be used to object to the definition of saving faith provided above.
20 But would you like evidence, you empty fellow, that faith without works is useless?
21 Was not Abraham our father justified by works when he offered Isaac his son on the altar?
22 You see that his faith was working together with his works and his faith was perfected by works.
23 And the scripture was fulfilled that says, “Now Abraham believed God and it was counted to him for righteousness,” and he was called God’s friend.
24 You see that a person is justified by works and not by faith alone.
A few points: this last verse is usually what those who think James 2 contradicts Protestant theology hone in on. However, if the justification in question is the “vindication” (for parallel uses of justification as meaning vindication, see Matthew 11:19, Luke 10:29, Romans 3:4, etc.) of one’s claim to saving faith before men rather than before God, as 2:18 first suggests and the repeated phrase “You see” reiterates, then the point of the passage is that both faith and [good] works are required, and this is not at all inconsistent with Protestantism.
Faith alone is not useless per se; the question is in what context it would be useless. Without the accompanying good works which should and would follow, justification of a claim to faith just isn’t possible. It is in this context that one’s “faith” without good works would be as useless as one’s “good works” without saving faith.
The Abrahamic citations that James provides are instructive. Clearly, since the faith which produces good works is the faith which is instrumental to our salvation, reference to Genesis 15:6 and Abraham’s status in God’s sight is natural. Justification before men is related to justification before God, for the former presupposes the latter. But because what counts as evidence of belief differs between an omniscient God and men, in order for this previous Scripture to be “fulfilled,” the exemplification of his faith in Genesis 22 was necessary. Related to this point is the following quote I have produced before on this blog:
James 2:22, NT Context: The Nature of Abraham’s Faith
“…The verb rendered by the NIV as “was made complete” (eteleiothe [from teleioo]) does not mean (despite Calvin’s support) that the actions revealed Abraham’s faith to be perfect (tetioo never has that sense); nor does it mean that works were somehow tacked onto a faith that otherwise would have been incomplete, for James’s point is that such faith does not really count at all, it is simply useless. Rather, to follow James’s argument we must recognize that although the expression teleioo linked with ek (i.e., Abraham’s faith “was made complete… [lit.] out of” works) is found nowhere else in the NT, parallels found elsewhere are illuminating. Philo tells us that Jacob “was made perfect as the result of [ek] discipline” (Agriculture 42); alternatively, he “was made perfect through [ek] practice” (Confusion 181). In other words, he grew in maturity as a result of the stresses laid on him. In Philo, however, the maturation take place in a human being. Jacob; here in James this “maturation” takes place in an inanimate object, faith. This prompts Moo (2000: 137) to suggest that the closest conceptual parallel is 1 John 4:12: “if we love one another, God lives in us and his love is made complete [teteleiomene estin] in us.” Transparently, God’s love is not somehow lacking something, intrinsically deficient, until we love one another; rather, “God’s love comes to expression, reaches its intended goal, when we respond to his grace with love toward others. So also, Abraham’s faith, James suggests, reaches its intended goal when the patriarch did what God was asking him to do” (Moo 2000: 137)…”That is, the explanation of the phrase “faith was perfected by works” has to do with a teleological end of faith, not an alleged insufficiency of [saving] faith alone to function in any capacity whatsoever.
25 And similarly, was not Rahab the prostitute also justified by works when she welcomed the messengers and sent them out by another way?
26 For just as the body without the spirit is dead, so also faith without works is dead.
Some attempt to push analogy between body:spirit and faith:works too far. Surely the idea that one is not spiritually alive until he does good works is going too far. Likewise, if spirits can be without bodies (2 Corinthians 12:2), does that also imply one can do good works apart from faith? Analogies have limits. James is simply reiterating his previous statements: saving faith and good works go together naturally. You will either find both or neither.