I usually like to start these posts with some qualifications. First, I have no qualifications. As we will see, I have no familiarity with the relevant philosophical issues. Second, I am drunk. For reasons that I don't want to get into, I am a bit upset about things and drowning my sorrows to some extent.
I have no idea what contextualism means. I don't particularly care to defend it. But whenever I see arguments like the one that Dave advances, I want to take a step back and ask how several interrelated issues are being addressed - the most notable being, for our purposes, the definition of reality.
We all understand that truth involves some correspondence to reality. But what is reality? If you are sufficiently agnostic about what constitutes reality, then just about anything flies, and it becomes impossible to "know" anything. This I take to be the core of the skeptical approach. There could always be a demon manipulating your perceptions. You could always be a brain in a vat. There can always be a "true" reality underlying your "false" perceptions.
But this is unsatisfying, and there are any number of ways to push back against it. After all, what is it that separates reality from illusion? A persistent, predictable "illusion" might be reasonably treated as reality, however "illusory" it is on some level. Hilary Putnam famously challenged metaphysical realism by questioning our ability to "refer" to the "underlying reality." (Very briefly, it is difficult to articulate a theory of reference that would allow a "brain in a vat" to refer to the vat, and so a mind in that circumstance could not utter a truthful statement along the lines of, "I am a brain in a vat." And if you can't truthfully say that you are a brain in a vat, then it's pretty clear that you are not a brain in a vat.)
But I think the real value of Putnam's approach is not its narrow victory over metaphysical realism (which is, as I may discuss in another post, somewhat tenuous). The value consists in forcefully posing the question, "What good is inaccessible reality?" In other words, if you know with absolute certainty that every one of your experiences will be dictated by a particular set of facts and rules, then what do you care whether those facts and rules are "illusory" or not? If "reality" is inaccessible to you, and irrelevant to your life, then what exactly is its claim on your attention? Shouldn't you pay more attention to the "illusion" that actually governs your life?
So to put it another way, there is a very strong argument that "reality" should be understood in terms of (and relative to) our experiences. If certain pieces of bread are "really" the body of Christ, but they retain all of the physical characteristics of bread (calories, gluten content, etc.), while having none of the physical characteristics of human flesh, then shouldn't we say, "So much the worse for 'reality.'"? For our purposes, the bread is bread, not human flesh. (Of course it is a very different story if you take the afterlife seriously - in that case, I would strongly recommend paying very close attention to whether any particular piece of bread is the flesh of Christ.) In other words, shouldn't we define "reality" relative to the things we care about? I simply do not care if this burrito is "really" a hammer, so long as it has all of the physical characteristics of a burrito (and not a hammer). If on some other level of reality, totally inaccessible and irrelevant to me, it is a hammer, this concerns me not at all. I will eat any hammer in the world, so long as the consequences are identical to the consequences of eating a burrito.
I've spent more time than I intended on the question of what is reality. But that's all right, because this is the most important question. If you conclude that "reality" can be anything (so that the whole world could be an illusion concocted by a demon), then it is very hard to avoid skepticism (since we only have access to the physical world, and can therefore never rule out any metaphysical theory). If you conclude that "reality" consists only of the world that matters to us - the empirically testable physical world that shapes our experiences - then skepticism has a much narrower appeal. Skeptics are left to argue that even the physical world is resistant to human knowledge, for whatever reason (maybe Humean doubts about our ability to ascertain whether the future will resemble the past).
Having set the stage in this way, let's consider how a more appealing contextualism might play out. We will imagine at first that a Protestant has come across what appears to be a piece of bread. His Catholic friend is urging him not to eat it, because it may not be bread at all - it may be human flesh. (I apologize for any theological errors I am about to make.) Catholics, you see, believe that bread can be "transubstantiated" into the flesh of Christ through particular procedures. After transubstantiation, the object that was formerly bread is no longer bread. (If it remained bread, while also becoming the flesh of Christ, this would be called consubstantiation, not transubstantiation. Catholics believe in transubstantiation, while Anglicans believe in consubstantiation. Or so I have been led to believe.) So you might say that every Catholic is skeptical about every piece of bread, unless the Catholic has monitored the bread continuously since it came out of the oven and can therefore be assured that it has not been transubstantiated by a priest into the flesh of Christ (at which point it would no longer be bread).
Now I think it's fair for the Protestant to say (in a contextualist manner): "Look, my friend, this piece of bread may not be a piece of bread to you, but whether or not it has been transubstantiated into the flesh of Christ according to your belief system, it remains a piece of bread to me. Its suitability for making a peanut butter-and-jelly sandwich for my lunch simply doesn't turn on whether it is human flesh, according to your views. If it were actually human flesh, of course I would recoil in terror, and I wouldn't even consider making a peanut butter-and-jelly sandwich with it. But look at it - it doesn't resemble human flesh at all. It is extremely bread-like in its physical manifestation."
And I think Dave would say, "Very well. Protestants don't adhere to a belief system that acknowledges the particular metaphysical reality that Catholics believe in. But this is a matter of terminology. Within the Catholic discourse, the use of the term 'bread' to refer to the object would make no sense. It's just the French/English example all over again."
But I think Dave would be wrong. It's easy to see how even Catholics, communicating among themselves, might refer to the object as a piece of bread. After all, it has all the physical characteristics of bread. It will provide nutrients to most people, but will sicken a celiac. It is suitable for vegetarians (unless they have a moral objection to eating meat in the form of Christ's flesh - but it is not as though Christ's flesh is produced on a factory farm). Its nutritional and caloric content, in other words, have absolutely nothing to do with whether or not it is bread, on the one hand, or the flesh of Christ, on the other. If a Catholic who is a celiac asks whether there is bread in a recipe, another Catholic would be extremely foolish to reply that there is no bread, on the grounds that all of the bread has been transubstantiated into the flesh of Christ. (Catholics believe that even when bread has been transubstantiated, it retains all of the physical characteristics of bread, including its gluten content.) In context, the celiac should be informed that there is bread in the recipe, even though no devout Catholic believes that there is any bread in the recipe. This seems crazy! How can we explain it? Well, "bread" can't be understood in some absolute, context-free sense. What is judged to be "reality" is context-dependent. When someone's intestinal lining is at stake, you've got to communicate the physical "truth" about the food even if you are lying about its metaphysical "reality." There are no atheists in foxholes, and there are no metaphysical realists when it comes to allergy labeling.
So if contextualism is another word for "judging truth according to the reality that has been accepted as relevant for the situation," then I think contextualism is eminently defensible, and it "defeats" skepticism to the same extent that anti-metaphysical-realism defeats skepticism more generally. It's quite possible I've misunderstood contextualism, but it seems to me that there isn't much point in drawing fine lines here. These discussions all tend to circle back to the same questions about what constitutes reality. There are any number of ways to restate these arguments, but fundamentally I don't think skepticism (in the "metaphysical realism" sense) deserves the deference it has traditionally been given. If you take that crap seriously, then it is trivially true that knowledge is impossible. Since that is a pretty pointless conclusion, we try to redefine knowledge to encompass the "reality" that is relevant to us. Whether we do this through the Putnam channel, or the "contextualist" channel, or the pragmatist channel, it seems to me that the results are basically the same. These issues should be dealt with comprehensively and not piecemeal, as the tendency in philosophy seems to be.