Islamhearted,
I have been taught that this is referring to both Israel and Jesus.
Isaiah is writing about Israel. They were in exile in Babylon and God was going to redeem them and bring them home to Israel. The prophet Isaiah talks of Israel as a individual entity, an innocent person who is suffering unjustly. I think Isaiah means God would transform their suffering in exile into a sacrifice, and make Israel a blessing for all nations. See the Jewish interpretation here: http://web.archive.org/web/20071212211718/http://www.geocities.com/logic_faith/prophecies_files/suffering_servant.htm - http://web.archive.org/web/20071212211718/http://www.geocities.com/logic_faith/prophecies_files/suffering_servant.htm
Now, it is obvious how this refers to Jesus. The one despised and rejected by mankind, he: "Surely he took up our pain and bore our suffering, yet we considered him punished by God, stricken by him, and afflicted. But he was pierced for our transgressions, he was crushed for our iniquities; the punishment that brought us peace was on him, and by his wounds we are healed."
And here is an important one for a Christian interpretation:
"Yet it was the LORD�s will to crush him and cause him to suffer, and though the LORD makes his life an offering for sin..."
What is compelling about this passage for Christians is how close this image is to the suffering of Jesus.
Isaiah may have only spoke these words only believing they were for the nation of Israel, but they have significant theological relevance for Christians nonetheless.
If God could will that Israel should suffer for the sins of His people, then God could also will that His Son should suffer too. The idea is the same whether we talk of Israel or Jesus. The sacrifice is the end of sin and it opens the way for God's people and the world to be redeemed and blessed.
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