James chapter 2 is by far the most common chapter that we find ourselves having to explain in the Free Grace movement. This chapter is almost unanimously interpreted to mean that unless faith in Jesus Christ is accompanied by good works, then that faith doesn't count, and the believer will still go to Hell when they die.
It's vital, then, that we have a thorough understanding of what's being said in this chapter.
The chapter begins with an exhortation to "have not the faith of our Lord Jesus Christ, the Lord of glory, with respect of persons" (James 2:1), and continues on to remind us that we should not treat the rich any better than we treat the poor (James 2:2-13).
Then, we get into the contentious part of the chapter, which begins:
James 2:14-17
14 What doth it profit, my brethren, though a man say he hath faith, and have not works? can faith save him?
15 If a brother or sister be naked, and destitute of daily food,
16 And one of you say unto them, Depart in peace, be ye warmed and filled; notwithstanding ye give them not those things which are needful to the body; what doth it profit?
17 Even so faith, if it hath not works, is dead, being alone.
Beginning our analysis of the above with verse 14's question - "can faith save him?" - we must first ask ourselves, "save him" from what? From Hell?
Well, yes, we already know from elsewhere in Scripture that faith without works is sufficient to justify any sinner:
Romans 4:5
5 But to him that worketh not, but believeth on him that justifieth the ungodly, his faith is counted for righteousness.
Above, we see that faith without works is "counted for righteousness", because Christ "justifies the ungodly" as a gift (Romans 6:23) requiring no works (Ephesians 2:8-9).
Therefore, the "saving" being spoken of in James 2:14 refers to Salvation from the temporal chastening of God (Hebrews 12:6), which results from not helping brethren in need. Faith alone cannot save one from that.
Notice also that twice in the passage above, the question "what doth it profit" is asked about faith without works (James 2:14, 2:16). The answer, in the context of helping the brethren, is that it doesn't profit the brethren, in the same way that simply saying "be warmed and filled" to a brother needing food and clothing wouldn't do them any good (James 2:15-16).
On the contrary, it would leave us with a dead - that is to say, inactive - faith, and so we are told three times that "faith without works is dead" (James 2:17, 2:20, 2:26), as it is not profiting those that we encounter in our daily lives, nor is it profiting us in all the ways that a lively faith would:
Titus 3:8
8 This is a faithful saying, and these things I will that thou affirm constantly, that they which have believed in God might be careful to maintain good works. These things are good and profitable unto men.
Above is a great example showing that a lively faith "profits" our fellow brethren in the flesh, because living out our faith provides tangible benefits to them.
The passage continues as follows:
James 2:18-20
18 Yea, a man may say, Thou hast faith, and I have works: shew me thy faith without thy works, and I will shew thee my faith by my works.
19 Thou believest that there is one God; thou doest well: the devils also believe, and tremble.
20 But wilt thou know, O vain man, that faith without works is dead?
Firstly, we see in verse 18 that we have an instance of a man showing another man his faith by his works, which is fitting, because that's the key to this entire chapter. God knows who believes and who doesn't, but the works that we do are testimonies to others that we believe, as they are choices to act out our inward beliefs.
Then, in verse 19, James points out that believers and demons both believe the same truth - there is one God. Yet, look at the different responses. One group responds well, the other group can only tremble. This shows that belief can be completely disconnected from action, depending on who holds the belief. Therefore, the implication is that one needs to take responsibility for how they know they ought to live, based on what they believe.
This verse is often used to say that "faith alone is a doctrine of demons", which is almost a comically bad explanation of this verse. To this end, we can point out that Jesus Christ only died for the sins of mankind (Hebrews 2:9), not the demons. Therefore even if we did hold the same belief in regard to Jesus Christ - which isn't even what the verse says - it wouldn't do them any good, but it would give us Eternal Life (John 6:47).
Finally, the chapter terminates with:
James 2:21-26
21 Was not Abraham our father justified by works, when he had offered Isaac his son upon the altar?
22 Seest thou how faith wrought with his works, and by works was faith made perfect?
23 And the scripture was fulfilled which saith, Abraham believed God, and it was imputed unto him for righteousness: and he was called the Friend of God.
24 Ye see then how that by works a man is justified, and not by faith only.
25 Likewise also was not Rahab the harlot justified by works, when she had received the messengers, and had sent them out another way?
26 For as the body without the spirit is dead, so faith without works is dead also.
Here, we are given instances of "how that by works a man is justified" (James 2:24), in other words, in what sense a man is justified by works.
The primary example that is given is that of Abraham, and by looking at a parallel passage in Romans 4, we can see that this is in reference to his justification before man, and not before God:
Romans 4:1-5
1 What shall we say then that Abraham our father, as pertaining to the flesh, hath found?
2 For if Abraham were justified by works, he hath whereof to glory; but not before God.
3 For what saith the scripture? Abraham believed God, and it was counted unto him for righteousness.
4 Now to him that worketh is the reward not reckoned of grace, but of debt.
5 But to him that worketh not, but believeth on him that justifieth the ungodly, his faith is counted for righteousness.
Abraham was justified by works, but not before God, because of the reasons given in verses 4 and 5. Works cannot justify you before God, because God's standard is perfection (Matthew 22:37-40), and a works-based justification before God would demand perfect obedience to God's commandments (James 2:10, Galatians 5:3), which is why no one has ever been justified before God by keeping the Law (Galatians 2:16, 3:11, Romans 3:20).
Furthermore, later on we are told that when Abraham was circumcised, he was receiving a token of the "righteousness of the faith which he had yet being uncircumcised" (Romans 4:11). The passage in James is discussing his offering of his son Isaac, which happened many years after he was circumcised. In other words, Abraham was justified and made righteous before God years before the event discussed in James chapter 2, when his actions vindicated him before man.
James 2:23, which talks about how Abraham's faith was counted to him for righteousness, is a quotation from Genesis 15:6, and is also seen in the parallel in Romans chapter 4 (Romans 4:3). The same verse is quoted in Galatians 3:6, which belongs to another chapter that makes it abundantly clear that we are justified by faith, not works. In context, and comparing Scripture with Scripture, the idea that James is saying we get eternal justification before God by works is simply an untenable position.
James chapter 2, with its constant reminders to avoid "faith without works", is actually one of the clearest testaments to the Free Grace assertion that faith means believing something is true, rather than "submission to obey Jesus for the rest of one's life" - which is what "believing in Jesus" is commonly asserted to mean by those who teach a thinly-veiled works Salvation.
Other clear testaments to this fact are Romans 4:5, and Ephesians 2:8-9, but it's ironic that the go-to prooftext for works Salvation actually assaults the very bedrock of their position - that "faith" or "belief" in Scripture mean far more than their dictionary definitions would lead us to believe.
However, from this chapter, we see what common sense already bore witness to - that it's possible to have your works not match your faith, even if that faith is genuine - i.e., it's possible to be a hypocrite. Acting hypocritically to a belief that one holds is something that everyone does on a daily basis, unless they have a horrific, mangled standard of right and wrong (Matthew 5:48, 22:37-40, etc.), or live in a self-righteous delusion as to how good they are.
No amount of hypocrisy can nullify the fact that someone believes something, it just shows that in the moment, they chose to act against their belief. If this were impossible, or if faith was always accompanied by a mysterious amount of works, the focal point of this chapter, "faith without works", wouldn't even exist. It would simply be called "unbelief". It's not called that in this chapter, because James, just like Jesus and Paul, taught that faith was believing something, and works were something separate.
It's puzzling that most of Christianity essentially believes that James is saying that good works in accordance with our faith "profit" us by getting us to Heaven, and "justify" us before God. Does that show any regard for our Savior's work and payment? Does that position exalt God, or man? Does that position elevate Christ as Savior, or one's own self as savior?
Rather, this often-twisted chapter encourages a lively faith - not because some mysterious level of hypocrisy will invalidate one's faith, but instead because it will profit those around you, and bear witness to the fact that you are a Christian, to them.