Bob Murphy, Paul Krugman, and Karl Smith all weigh in on "confidence" in macroeconomics.
Without diving into any of the issues any of these guys specifically raise, I would say this:
1. Expectations matter for economic decision making
2. Assessments about the quality of our expectations matter for economic decision making
Both can be referred to as "confidence". Sometimes the exact meaning is a little garbled. When someone has this thought in their brain: "I am not confident in the prospect of future growth", that is an important collection of firing synapses from the perspective of the macroeconomist. It's unclear exactly what it means of course. It could mean "I am very sure the economy will not do well", or it could mean "I am not very sure how well the economy will do". The very ambiguity of the sentence says something important about the way we think about uncertainty and the future, and which meaning we are communicating has important consequences for the economy.
Regardless, confidence is clearly important.
All this mocking of the "confidence fairy" by Krugman can be very misleading, I think. What he means is that some uncertainties play a more important role than others. He doesn't think the uncertainties that Don Boudreaux or Robert Higgs talk about play a very important role right now. He does think that other uncertainties do play an important role.
But talking abstractly about "confidence" and "uncertainty" doesn't make much sense. We expect things about the world, but we aren't always very sure about what we expect. What matters is those expectations, and people should talk more about that.
What Krugman should just come out and says is "austerity will not cause people to expect more growth or to be more sure of their current expectations about growth". That's all he really means when he talks about "the confidence fairy". We need to drop the metaphysics around "confidence". It's all about human guesses about the world we live in, and action on the basis of those guesses.
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