Let's take some basic context and expand out a few verses.

James 2:21-24

Was not Abraham our father justified by works when he offered up his son Isaac on the altar? 22- You see that faith was active along with his works, and faith was completed by his works; 23- and the Scripture was fulfilled that says, “Abraham believed God, and it was counted to him as righteousness”—and he was called a friend of God. 24- You see that a person is justified by works and not by faith alone.

What you believe will ALWAYS affect your actions; I believe this is what James is going for.

It's not enough just to say you believe. Imagine I said, "hey, I believe that this parachute will keep me safe if I jump out of this plane." That's great, but there's no better demonstration of faith/belief than to actually jump out of the airpline! James is just showing that our beliefs always inform our actions (or "works"). So, if you are merely saying that you have faith, you may or may not actually have faith. But, if your faith is genuine, it WILL show itself through your actions.

I don't see any contradiction between this and the idea of Ephesians 2:8-9:

8 For by grace you have been saved through faith. And this is not your own doing; it is the gift of God, 9 not a result of works, so that no one may boast.

So, to sum it up, saving faith evidences itself in our behaviors. It is still faith which God requires, and works alone are no substitution for faith. Though, like James said, real faith will show in works. I think an honest examination of this text points towards faith being required, but James makes the very practical observation that true faith will affect the way you live/act.

Like John the Baptist said, "Bear fruit worthy of repentance!" The Gospel proclamation has always included calls to action ("works"). For example, Acts 17:30:

The times of ignorance God overlooked, but now he commands all people everywhere to repent,

God commands repentance (the act of turning away from sin). Again in Luke 13:3, Jesus said:

No, I tell you; but unless you repent, you will all likewise perish.

Mark 1:15

15 And saying, The time is fulfilled, and the kingdom of God is at hand: repent ye, and believe the gospel.

Even believing the Gospel is something God commands us to DO.

Finally, Hebrews 11:6:

But without faith it is impossible to please Him, for he who comes to God must believe that He is, and that He is a rewarder of those who diligently seek Him.

God requires faith from us, and genuine faith will lead to works. On the other hand, works alone without faith will not please God, because we can not PURCHASE the gift of eternal life from Him or EARN it by our good works.

Isaiah 65:6:

All of us have become like one who is unclean, and all our righteous acts are like filthy rags; we all shrivel up like a leaf, and like the wind our sins sweep us away.

You can't be justified by your works. Our sin is like a crime against Holy God. We can't just pile good deeds on top of sin and hope it evens out.

Imagine a human court of law: "Your Honor, I'm sorry I robbed that bank, but I gave half the money to charity!" The judge will say, "I'm glad you were charitable, but no amount of good deeds will change the fact that we are here to deal with your crime!"

In the same way, God sees us all as guilty before Him, and we are all deserving of His wrath. Jesus Christ died on the cross for the forgiveness of sins, and we must turn to him from faith rather than hopelessly trying to cover over our sins with our own works.

This verse by itself may seem to some that it is implying works based salvation, but upon further examination, this is not necessarily the case. Proponents of Sola Fide would cite the context of the passage and also the harmony of Scripture to argue that James' language doesn't actually suggest works based salvation.

The Verse's Context

To understand the context, look at how the passage begins (all emphasis added).

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.

Notice first that the the accusation is for a person who says he has faith, but does not also have works. James is making a statement about the relationship of faith to works, specifically that if you don't have works, your faith itself is dead. It's not really faith at all if there are no works. He gives an example of a person who says to somebody that he wants them to be warm and full, but does nothing about it. If you actually had wanted them to be warm, you would have given them something, rather than just saying it. In his epistle, James focuses much on the mouth and the things that we say, and where our hearts truly are. He wants to make sure that we can test what we have to know if it's just more than lip service.

The fact that he says that faith without works is dead seems to imply that to James, if you don't have works, you don't have a real or living faith. A dead or fake faith can't save you.

Continuing, he says:

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.

It's clear hear that he's talking about evidence. Faith is evidenced by works. If you have works, you have faith. James is saying that you can't see his faith by itself, but by doing works, he can prove to you that he has faith. The two are linked together in the sense that faith is the cause of works.

A great example that I've heard, which I like, is that of a body that's breathing. If a body isn't breathing, it's dead, but if you can see it breathing, you know it's alive. However, if you took a dead body, one that's been dead for a day or two, and put pumps in it and just made it breath, that wouldn't make it alive. In the same way, if you have faith, you will work, because you are now alive in Christ, but no amount of works will cause faith or make you alive in Christ.

Similar Message in Pauline Epistles

To further demonstrate this same relationship, many proponents would also point to works by Paul, such as Ephesians 2:8-10:

8 For by grace are ye saved through faith; and that not of yourselves: it is the gift of God: 9 Not of works, lest any man should boast. 10 For we are his workmanship, created in Christ Jesus unto good works, which God hath before ordained that we should walk in them.

Paul is very clear here on the manner of salvation, as he is in very many places. Paul focused much on salvation by faith alone. Here, he talks about both faith and works, along with their relationship. The method of salvation is faith, the argument being that if we worked for it, it would not be a gift, and we would have the glory for the salvation. But the relationship of faith to works is that after we have been saved by faith, born again, as Paul describes in other places, then as this new workmanship in Christ, we are set apart to work. A purpose of our salvation is that we should perform good works. Romans chapter 6 goes further into explaining how we should work once we are saved. That chapter begins:

1 What shall we say then? Shall we continue in sin, that grace may abound? 2 God forbid. How shall we, that are dead to sin, live any longer therein? 3 Know ye not, that so many of us as were baptized into Jesus Christ were baptized into his death? 4 Therefore we are buried with him by baptism into death: that like as Christ was raised up from the dead by the glory of the Father, even so we also should walk in newness of life.

The reason Paul asks this rhetorical question, "Shall we continue in sin, that grace may abound?", is that in chapter 5, he explains fully that faith requires no works, and even our continual sin would simply make grace even better. It would lead his readers to believe that we should not work, but he goes on to explain that we should work and why. His reason for working was not so that we should be saved, but that we, having been given a new life, have become in the likeness of Christ, and so we should from then on act consistent with this new nature. The rest of the chapter expands that thought.

Conclusion

So, we can see that Paul, the author who wrote many more epistles, and who spent much of that time focusing on salvation by faith alone also teaches very clearly that there should be works. In Paul's teachings, faith comes first, but works will follow true faith.

In the passage by James, in a book that is dedicated to proving out your salvation in your everyday life, James paints a picture of how faith without woks is dead. James does not clearly say here that he believes that faith alone can save, but it isn't necessary that he is saying here that works save. He does state that one who is saved will have works.

Therefore, the options are either that James is trying to defy Paul's teachings to say that works are necessary to cause salvation, but doing a rather poor job of making it obvious that he's discussing the manner of salvation, or James is echoing the exact same message as Paul and the other epistles, that works is a necessary outcome of faith, and using language that focuses on these necessary evidences to help the reader further identify whether or not he actually has saving faith. If it's the former, then as Luther believed, it should probably be removed from canon. If it is the later, then it harmonizes well with the other epistles and the rest of his own epistle, and reminds us well that we should test out our faith. Sola Fide proponents would choose the latter explanation.

According to the New Bible Dictionary, 2nd Ed., "Justifiction" entry, Paul used justify as a technical term, but James used it in a general sense of being vindicated, or proved genuine and right with God and man (p. 649).

"James quotes Gn. 15:6 for the same purpose as Paul does -- to show that it was faith that secured Abraham's acceptance. But now, he argues, this statement was 'fulfilled' (confirmed, shown to be true, and brought to it appointed completion by events) 30 years later, when 'Abraham (was) justfied by works when he offered his son Isaac upon the altar' (v 21). By this his faith was 'made perfect', i.e. brought to due expression in appropriate actions; thus he was shown to be a true believer" (p. 649).

Paul would have agreed with James when he wrote, "Do you not know that the unrighteous will not inherit the kingdom of God? Do not be deceived, neither fornicators, nor idolaters, nor adulterers, nor h*m*sexuals, nor sodomites, nor thieves, nor covetous, nor drunkards will inherit the kingdom of God" (1 Corinthians 6:9-10). There should be a real change of life when believing that you are a sinner before God and have repented from it.

John echoes this point when he writes, "Little children, let no one deceive you. He who practices righteousness is righteous, just as He is righteous" (1 John 3:7). Righteous is as righteous does. These are acting out what God has called them to be.

The children of God have been declared righteous and justified when they believed in Christ. But we can tell by their behavior afterward which ones took their faith seriously, no? This is what James seems to be saying. Those who are taking their faith seriously by their works are doing what Peter wrote, "Therefore, brethren, be even more diligent to make your calling and election sure, for if you do these things [the fruitful works of vv. 5-8] you will never stumble" (2 Peter 1:10).