I've always found the Lutheran emphasis on Law and Gospel seemingly contrived. It appeared as some systematic commitment that rearranged Scripture into some bizarre patterns. This is not a division between Old Testament and New, but rather a division between two kinds of speech acts by God: command and promise. The first direct man to act and follow God's will. However, in a world of sin, this is impossible and results in fear and despair, as God's judgement looms. The second is God's promise of redemption, rescuing man from his inability and corruption. Thus, the first exposes our reality, our inability, and the second brings healing relief.
Now, this has been interpreted, generally, in two ways. Some Lutherans impose a radical division between the two. The Law terrifies and represents a problem to overcome, which the Gospel ends with the unending fount of God's grace. This brings about freedom and a kind of transcendence over the moral order, which only damns. This interpretation leads to conclusions that smack, if not openly embrace, anti-nomianism and libertine social mores. When challenged with God's prohibition (say, against homosexual acts), this is dismissed with the charge of confusing Law and Gospel. This approach doesn't necessarily deflate sin, but it does this through perhaps hyper-pessimism where all Human action is warranted as sinful to its core. Thus, it really doesn't matter, because it's always sin when viewed against Law, and liberated when viewed against Gospel.
Another approach, perhaps labelled as more conservative, sees a dual kind of righteousness at work. In terms of God, the Law condemns are helpless and evil works, and the Gospel rescues us, completely and totally. However, in terms of Human relations, the Law still serves to instruct our disposition, judgement, and action. The Law does not justify man before God, for Christ fulfills the Law and brings His victory to the Human race, which we get joined up in when we mix our faith to this mighty act. But the Law directs us down and out towards our neighbor, who we must actively serve and love.
My own views reflect this second approach. While the first definitely revels in the Biblical revelation of God's sheer mercy, it tends to diminish and ignore, through theological manipulation, clear mandates. This first view is generally responsible for turning the Sermon on the Mount into ethically useless terror through a doctrinal matrix which appears rather foreign to the text.
Yet, I'm not convinced by the second view, at least as it is. The idea still seems lacking, as it rejects the idea, as St. James puts it, of drawing near to God. Now, I don't want to diminish the radical, world-turning, grace of God, nor do I want to diminish the fact that it is faith, even faith alone, that attaches us the transformative power of Christ, His person and work. But, as the Apostles learned, it takes not only faith to drive out demons, but fasting and prayer. Yes, even to the point that James can say that works justify.
I'm not sure I'm being novel, but my argument is what if this relation between Law and Gospel is still too antagonistic. What if this distinction highlights dispositional junctures in the life of the Christian, which continue to coexist and battle in This Age, afflicted as we are by Sin, Death, and the Devil.
Maybe the dispositions represent the difference between inside and outside we still experience of God. Outside of Christ, the Word of God that came, comes, and is coming into the world, we see only a dark shroud. The Creation reveals mixed messages that present us with unstoppable judgement and terror, a hostile and empty world of doom. The clear facts of reality are conflicted and assaulted: we were born to live, but we die; we were born for radiant and royal glory, but we are captive to demeaning and debasing spiritual darknesses; we were born for equity and righteousness, but are mired in inequity and sin. The whole creation seems to be in death pains, vomiting us from its crust. When God appears, we scurry in terror. For the gates of Pardise, our home and destiny, remained locked and protected by fiery angelic blade.
However, when we see Christ, in a vision of what is to come, per the saints of the Old Testament, or in the flesh He adorned for our salvation, after His incarnation, something new is opened up. We now hear a promise, and now see it fulfilled. We see mercy cascade, we see life vanquish death, righteousness vanquish sin, and the Lord of Glory vanquish Satan. We receive the promise of God's deliverance and might hand through faith. The whole world is revealed anew in our mind.
However, without the promise, we are left with the first view. Is this merely a bad thing? No, says holy Paul, who rejoices in even the perceived failure of God's holy things. The Law is holy and just, but how can we see it as God's work if it failed in making mankind just? It only condemned us! Yes, says Paul, and it accomplished its work even then. The Law magnified sin, revealing it as a light reveals the creepers and crawlers in the basement. Like many scenarios in the Old Testament, even when God is denied, rejected, humiliated, His Word accomplishes its work. Even when Christ is crucified, God's mission is victorious.
As we are now, still trapped in Paul's lament in Romans 7, we still see both perspectives. Life according to the flesh tells us we live in the bleak night of terror, but life according to Spirit tells us otherwise. It's an internal battle, as the flesh is strengthened through fear of death and the instigation of demons. Thus, the Law enters. In the Spirit, to whom we are joined by faith in His Anointed, the Law becomes our fullest desire, our destiny, and hope. To be a Human, to walk with God, is to do the law of Christ, the law of Liberty. However, as much as we are still in battle, this Law also smashes through the pretensions of the flesh, scattering the demons.
In Christ, the Law fulfilled is our great treasure, we being joined to Him, becoming like Him by grace what He is by nature. Outside of Christ, and thus subjected to the hiddeness of God, we see nothing else. The struggle of the Christian life is to keep our eyes on Christ, like St. Peter on the waters, clinging to the Spirit against the flesh.
I think this is how best to understand the distinction, not opposition, of Law and Gospel. If it is confused, we wallow in despair or abound in arrogance. In the former, we see in Christ the Hidden God and hide in terror. He is no mediator, so we turn elsewhere and build an a-theology of faithlessness. In the latter, we find God in the Creation, rejecting Christ. This fantasy can only lead to disappoint and disillusionment, or become insufferably tyrannical. In both cases, Christ is not the Word, and verge on being some other faith. I won't list examples, I'm sure you can think of them.
This is what I believe to be the treasure of Luther's insistence upon this, which is neither innovative nor extra-biblical. It is simply the Apostolic faith.