I don't think we can do
anything that is meritorious, whatever it may be, even if commanded in the Law; Christ has done it for us. However, we do, as sanctification procedes, more and more works which correspond to the Law, because we are coming to love it and God's ways.

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You're absolutely correct, but my understanding of the Standards quoted above is not whether those acts are meritorious or not, but whether they are in fact good works according to a confessional understanding of Scripture.
I think this is a bit of a sideline to what was originally asked re: two kingdom view. My understanding, and please correct me if I'm wrong, has more to do with the power of the Church to make proclaimations based upon its authority.
A great example of one way this played out in Presbyterian history was in the schism of 1860 when the Southern Presbyterians called the Northern Church on the carpet for overstepping their authority. At that GA a statement was produced calling upon the Presbyterian Church to pledge its alliegance to the Union, and against slavery. The Southerners said that it had no authority to do so, that both points went beyond Scripture, binding consciences on issues not specifically taught in Scripture.
Thornwell, and Dabney, (among many others) recognized that Christ's power was meant to be applied through the Gospel in the form of faithful proclaimation of the message of Law and Gospel from the pulpit on the Lord's Day. To abuse the keys of the Kingdom, forcing members to submit to statements like the one briefly described above, was seen as a heinous misundstanding of the power of the Church. Not only this, but it severed unity by taking peripheral issues that had more to do with economics, provincial power, and egalitarianism than with the theology central to membership in the Church.
According to this scenerio, the principle of two kingdoms would have allowed brothers and sisters in each section of the Presbyterian Church at that time to disagree on issues of politics and national alliegance while agreeing in the central issues of theology and ecclesiology. It would seem to me that Christ's prayer that we would be as one is more perpetuated by a healthy understanding of this principle than by the hyper-Kuyperian "redeem culture" ideas propounded in many circles today.
I see no reason why I, an old school limited gov't conservative/libertarian can't sit beside a lover of Pres. Bush or a hard-core liberal Democrat and worship the same God, recognizing our primary identity is as those washed in the blood of Christ, members of that Holy Nation that Christ gave Himself to save. By confusing our political works with that of the preaching of the gospel we run the risk of falling for the essence of the last century's liberalism.
Obviously these words are not meant to suggest that anyone here propounds the extremes addressed above. I recognize that it is unlikely that CRC people are going to view this board, but I do believe that there is a "slippery slope" argument that has merit in this discussion.