One Dispensationalist's Perspective
You ask a number of subsidiary questions in your comments to Mike's answer.
I will likely attempt to answer some of those in this answer as well, since some relate. Also, in general, this will not agree with Mike's perspective on why dispensationalists interpret as they do. Finally, my dispensational articulation here may not match all dispensationalists and their views, but if another were to come along and read it, I believe he/she would generally agree with what I will assert here--and it seems that any articulation from one holding the view should help tremendously in clearing up a number of things.
Some Necessary Clarifications
First, dispensationalism is not chiefly an interpretive framework (or "interpretive template laid over all of scripture"), but rather
a theological framework (see this answer for more discussion of that).
Second, Jon Erickson in a comment asked, "Isn't the dispensational framework mostly concerned with eschatology?" No, but I can see how one might think that from the outside. Again, I refer to the other answer, though briefly, dispensationalism holds a doxological view of the purpose of history, which obviously culminates in the eschaton, making that a key focal point for dispensational discussions.
Third, you comment: "Covenant theology identifies two covenants but sees grace and law in both, whereas dispensationalism, in all forms draws a firm line at the cross between a dispensation of law, and one of grace." Dispensationalists do commonly label two of the dispensations as "law" and "grace." This has tripped up a number of people who have not carefully studied dispensational thought, because we also hold that there is "grace and law in both" (and all dispensations). I'll give Ryrie's definition of a dispensation, it is "a distinguishable economy in the outworking of God's purpose" (33).1 A full discussion is found in chapter 2 of his work, while some more specifics about the misunderstanding of law and grace can be found in chapter 6.
Fourth, both you and Mike are correct to call the dispensational hermeneutic a "literal" one, though I can tell you both perhaps do not fully grasp what that means to a dispensationalist. If one thinks "natural communication" when hearing a dispensationalist say "literal," then one will be far closer to grasping the idea. Such communication does not exclude figurative language, but also does not expect figures to be hiding under every word. Though some dispensationalists are just as guilty of this as other Christian interpreters, the key difference is that the dispensationalist will insist that the literal meaning remains and has importance, even if it is also secondarily being used in some figurative way. The figurative never supersedes what is clearly literal to begin with, and something is considered only figurative if it clearly is not literal to begin with.
So just as I am now writing straight-forwardly (naturally) to you right now, dispensationalists believe God gave Scripture the same way so that it can be reasonably and relatively easily understood (at least by the original target audience). In my straight-forward communication, I expect and you expect that I mean what I say, and so if I write "Israel" (in the context of biblical discussion) you are not naturally going to think an idea like "spiritual Israel" (at least I hope), but rather that I am probably referring to either (1) Isaac's younger son, a.k.a. Jacob, (2) the ethnic people descending from Jacob, (3) the united nation coming out in the Exodus and eventually having its own kings, or (4) the northern territory in the divided kingdom. Exact meaning would be based on actual context of the discussion--but even if there were a warrant to take a reference to Israel as "spiritual Israel," it does not (in natural communication) warrant you to read back into the text about Jacob, the ethnic group, the united nation, or the divided kingdom such an understanding. Normal communication does not work that way, else everything written about London, England could be attributed to London, OH (which is obviously ridiculous).
Having clarified these things, on to...
About Law Applicability
Here it is more likely that certain details noted could be particular to me (or a subset of dispensationalists), but at the least, it will show you how one goes about it.
There are two basic "grounds" for any law of God, either:
- It is based in God's nature of who He is, and the fact that mankind was made to be like Him, and thus reflect who He is (Gen 1:26).
- It is based purely on God's will via divine command (e.g. Gen 2:17).
Laws pertaining to (1) do not add anything new to what is required of a person, since what is required is not based on law, but on what a person was designed to be. However, a law can add a penalty for not following that law. Laws pertaining to (2) add a moral obligation to something that otherwise would be considered neutral (neither good or bad, such as whether fruit from a particular tree can be eaten or not), and that new moral obligation carries with it a penalty.
It is important to keep understanding of moral obligation separate from obligation of law.
So what dispensationalists recognize in Scripture from their literal hermeneutic is that God deals with Adam under certain laws, Noah under others, Abraham under others, Israel [see a smile here] under others, the nations under others, the Church under others, the millennial kingdom under others, and those in eternity under others. Anyone reading through the Bible would pick up this understanding quite naturally. It is in part the major shifts in these economies of how God operates that define the dispensations, which is why there are varying numbers of dispensations among dispensationalists, all depending on how minutely one wants to define a change of economy.
So as the laws change, I would say three main factors are key to knowing what laws one must follow.
(1) Target Audience
Who was the law spoken to directly? This group and this group only are subject to the penalties and any additional obligations. This is just as today. I'm not expected to follow the laws of Italy living in the USA. Likewise, if a law is given to Israel, it does not necessarily apply to Gentiles.
(2) Type of Law
A category (1) law is never rescinded as to moral obligation, but it can be rescinded by God as to penalty for violation of it. Cain did not die for murder (Gen 4:12), but such was to be so for those under Noahaic law (Gen 9:5-6) and Mosaic law (Ex 21:12-14), and arguably still today (since the statement to Noah covered all mankind at the time, and as best I know, never was rescinded). Additionally, the penalty can be changed (still keeping a penalty, just changing the consequence) by God at His will.
A category (2) law can be affected in both the same ways as a category (1) law, but additionally it can be rescinded entirely (returning the action back to a neutral state). Examples would be God rescinding the necessary observance of the Sabbath (Col 2:16) or the prohibition to eat unclean animals (Act 10:9-16).
(3) God's Command
Laws don't just come and go of their own--it is by Divine command (be that direct, or through revelation given by inspired authors of Scripture). So adulterers were to be killed under Mosaic law (Lev 20:10), but not so if they joined the church (1 Cor 5:1, 5; 6:9-11).
1 Charles C. Ryrie, Dispensationalism, Chicago, IL: Moody Publishers, 2007.