The point of departure for this discussion in BotW is the following passage from Exodus: "The Lord hardened the heart of Pharaoh". Erasmus writes: "It seems absurd that God Who is not just but good, should be said to have hardened the heart of a man so that by means of his iniquity God should show his power." To resolve this absurdity, Erasmus argues that God did not actively harden the heart of Pharaoh, but merely permitted Pharaoh's heart to harden itself. That is, God did not correct Pharaoh's sin, thus allowing it to take its own evil course. But Luther rejects this interpretation for many reasons. Firstly, he thinks it goes against the plain meaning of Scripture. He also points out that it doesn't really absolve God in the matter, since presumably He could have corrected Pharaoh's behavior instead of allowing him to languish in sin. Finally, and most substantially, Luther argues that this whole business of trying to justify God is misguided to being with. It is not the job of human reason to justify God. Instead, reason must be silent before the holy mystery of God:
Here, Luther rejects any speculative theodicy that presumes to reconcile the existence of evil with the goodness of God. In its place, he offers an existential theodicy based on faith, not understanding. For Luther, as for Kierkegaard*, the highest expression of faith is to believe that God is loving and good even in the deepest suffering. Indeed, a central insight of Luther's "theology of the cross" is that God's presence is to be found, not in glory and happiness, but in the dark night of suffering. As he says in the Heidelberg Disputation: "He deserves to be called a theologian who comprehends the visible and manifest things of God seen through suffering and the cross." Or as Kierkegaard wrote: "Faith sees best in the dark."Reason will insist that these are not acts of a good and merciful God. They are too far beyond her grasp; and she cannot bring herself to believe that the God Who acts and judges thus is good; she wants to shut out faith, and to see, and feel, and understand, how it is that He is good and not cruel... It is along this line that reason storms and contends, in order to clear God of blame, and to vindicate His justice and goodness! But faith and the Spirit judge otherwise, believing the God is good even though he should destroy all men...
This must be said: if you want the words 'they were very good' to be understood of God's works after the fall, you will notice that the words were spoken with reference, not to us, but to God. It does not say: 'Man saw what God had made, and it was very good.' Many things seem, and are, very good to God which seem, and are, very bad to us. Thus, afflictions, sorrows, errors, hell, and all God's best works are in the world's eyes very bad, and damnable. What is better than Christ and the gospel? But what is there that the world abominates more? How things that are bad for us are good in the sight of God is known only to God and to those who see with God's eyes, that is, who have the Spirit.
So far so good. The problem is that in the following sections (starting with V(iv)), Luther engages in the same type of speculative theodicy that he just condemned in Erasmus. Granted, he appears somewhat reluctant to do so, saying that he is only attempting to "humor reason". But, nevertheless, he pushes forward with his own apology for God. Luther says that God works on all humans "according to what they are, what He finds them to be: which means, since they are evil and perverted themselves, that when they are impelled to action by this movement of Divine omnipotence they do only that which is perverted and evil." Thus, God is the engine, so to speak, of all human action. But if the machines themselves are wicked and evil, then this divine power will result in evil acts.
As with all speculative theodicies, this explanation raises more questions than it answers, and it in no way lets God "off the hook." After all, why doesn't God make the evil instruments good, as he certainly has the power to do so? More to the point, how is Luther's position different than the one offered by Erasmus, which he trashed just a few pages ago? In both cases, God allows evil to remain; the only difference is whether he tolerates evil actively or passively. And that doesn't amount to much of a difference from the perspective of a suffering humanity.Here you see that when God works in and by evil men, evil deeds result; yet God, though He does evil by means of evil men, cannot act evilly Himself, for He is good, and cannot do evil; but He uses evil instruments, which cannot escape the impulse and movement of His power. The fault which accounts for evil being done when God moves to action lies in these instruments, which God does not allow to be idle.
In the end, all speculative theodicies flounder upon the following paradox: that a God who is loving and omnipotent has created a world in which suffering and evil run rampant. No explanation that takes both God and evil seriously will ever be able to solve this contradiction. The advantage of Luther's existential approach is that it doesn't try to resolve the paradox, but instead incorporates it into faith itself. Of course, this won't satisfy the theologian of glory who craves an all-encompassing explanation, but it will suffice for those who "know God hidden in suffering."
* Not to beat a dead horse, but Kierkegaard and Luther are on the same "wavelength" here. In his Gospel of Sufferings, SK writes: "If God is love, then he is also love in everything, love in what you can understand and love in what you cannot understand, love in the dark riddle that lasts a day or in the riddle that lasts seventy years... Right here is faith's struggle: to believe without being able to understand."