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As immediate response to the ironic use of "mutilation," Paul asserts: "For we [not they] are the circumcision [hence you do not need literal circumcision], who serve by the Spirit of God and boast in Christ Jesus, and who put no confidence in the flesh." This, not verse 2, is the principal sentence in the present appeal, full of theological grist that is going to be milled by means of Paul's own story in verses 4-14.
The emphatic we—not they—by which the sentence begins reflects Paul's regular habit in the middle of an argument to shift from the second or third person to the inclusive first-person plural whenever the point shifts to some gospel reality that includes him as well as his readers (cf. vv. 15-16 and 20-21 below). Thus it is we—you and us, Gentiles and Jews together—who are the true circumcision, which Paul elsewhere calls "circumcision of the heart, by the Spirit" (Rom 2:29, echoing Deut 30:6). Paul knows nothing of a "new" Israel; for him the one people of God are now newly constituted—quite in keeping with Old Testament promises—on the basis of Christ and the Spirit.
Paul first describes the true circumcision as we who [minister] by the Spirit of God. His use of the crucial verb latreuo (NIV worship) is determined by the LXX, where it most often denotes levitical service or ministry in the sacrificial system. Here it stands in ironic contrast to Philippians 3:2: mutilated priests could not serve in the former temple; the true circumcision now serve Christ in the new temple by means of the Spirit. As the rest of the sentence makes clear, what Paul has in view is neither congregational worship nor internal "spiritual" service (personal piety) over against external rite, but two ways of existing: in the flesh, meaning life centered in the creature as over against God, and by the Spirit, as people of the future for whom all life in the present is now service and devotion to God.
"Serve" thus still refers to "righteousness" (vv. 6, 9) but now especially has to do with reflecting God's likeness and character in how we live (i.e., looking out for the interests of others, 2:3-4, as modeled by him who revealed Godlikeness in emptying himself by taking on the form of a slave, 2:5-7). Such ministry, effected by God's own indwelling Spirit, is a million miles removed from religious observance. In turning Torah (or Scripture in any form) into laws to be observed, God's people turn them into mere human regulations, missing their intent as revelation of God's likeness to be lived out among God's people. Hence the need for a circumcision of the heart, effected by the Spirit, to replace that of the flesh.
The basis of such life in the Spirit is Christ himself, expressed in terms of "boasting/glorying" in Christ Jesus (see 1:26). This seems to be a clear echo of Jeremiah 9:23-26, where the Lord says that the truly wise will boast in the Lord (thus not put confidence in such "flesh" matters as wisdom, strength, wealth), in a context where "the whole house of Israel" is judged as being "uncircumcised in heart." This seems all the more pertinent here, since Jeremiah says that true boasting in the Lord means to "understand and know me," in the sense of knowing God's true character—which is exactly the point Paul will pick up in Philippians 3:8-11. As in Jeremiah, "boasting" here carries the nuance of putting one's full trust and confidence in Christ, and thus to glory in him. Although the Spirit functions as Paul's primary contrast both to "works of law" and to the flesh, in this letter he can scarcely bring himself to speak of Christian existence without mentioning Christ. In the personal narrative that follows, this is the theme to which he returns in grand style.
Finally, and now in contrast both to boasting in Christ Jesus and to serving by the Spirit of God, he adds the telling blow: who put no confidence in the flesh. This clause is full of irony, Paul's way of moving from the specific expression of Torah observance (the circumcision of the flesh) to what he recognizes as the theological implications of Gentiles' yielding to circumcision. It reflects the similar argument in Galatians 3:2-3, where "flesh" refers first to the actual flesh cut away in circumcision but at the same time is the primary descriptive word for life before and outside of Christ. As in that passage, Spirit and flesh are overlapping realities that describe existence in the "already/not yet." One lives either "according to the Spirit" or "according to the flesh." These are mutually incompatible kinds of existence; to be in the one and then to revert to the former is spiritual suicide. And this is where the Judaizers have gone astray; they reject boasting in the Lord in favor of confidence in the flesh. But there is no real future in the past, which Christ and the Spirit have brought to an end.
As a final addendum to the description in Philippians 3:3, but also as a lead-in to the personal word that follows, Paul appends though I myself have reasons for such confidence—although he actually says it a little more starkly: "though I myself have confidence even in the flesh." What this means will be clarified in the following sentence (vv. 4b-6). We who serve by the Spirit, Paul says, who boast in Christ Jesus, have thus abandoned altogether putting confidence in the flesh—which by implication is what the Judaizers are bringing Gentiles to by urging circumcision. But, he now concedes, if they want to play that game, then I win there as well, since I excel on their turf, "having [grounds for] confidence even in the flesh." Again "flesh" refers first to the rite of circumcision but now carries all the theological overtones of trying to have grounds for boasting before God in human achievement, the ultimate self-centered expression of life. And with that he turns to offer, first, the evidence for such a bold statement (vv. 4b-6) and, second, the zero net worth of such achievement in light of having come to know Christ and being found in him (vv. 7-9).