The wikipedia entry on Szasz clearly states he believes schizophrenia is a “fake disease.”

Yes, he does, as do I. But you seem to have grossly misunderstood what that means.

Szasz does not deny that there are people who really have hallucinations. As a practicing psychiatrist he has often treated people who had persistent hallucinations. What he denies is the popular pseudomedical theory that mainstream psychiatrists use to explain those experiences–the theory that they are “symptoms” of a single, identifiable disease, called “schizophrenia.”

Back in the 19th century, psychiatrists believed that there was a mental illness called “hysteria,” which they used to explain all kinds of experiences that many women of a certain class reported having — emotional fragility, psychosomatic reactions, inability to enjoy sex, etc. Nowadays most psychiatrists regard “hysteria” as a bogus diagnosis. That doesn’t mean that they deny that many woman experienced certain kinds of emotional fragility, or psychosomatic reactions, or were unable to enjoy sex. Rather, they now realize that there were various explanations for these experiences, some personal, some medical, and some cultural, and that these experiences were not best understood as common symptoms of some single, identifiable disease. Szasz believes the same thing about “schizophrenia,” and in fact about the category of “mental illness” broadly.

I don’t want to be rude, but Szasz has spent a great deal of time making this point carefully in his writing, both in articles and in book-length treatments of the topic. Maybe you would be better off engaging with what he says there, rather than trying to puzzle out his views from the brief descriptions in a WikiPedia article?

or, he believes seeing spiders that aren’t there isn’t a disease (or symptomatic of a disease).

The claim that hallucinations aren’t necessarily symptoms of an underlying disease is certainly not ridiculous; in fact it’s true, and easily demonstrated. For example, you can get hallucinations right now, without having anything that could be identified as a “disease.” For example, by depriving yourself of sleep for a long period of time, or by consuming a lot of liquor.

Now, for all I know, and for all that Szasz says, it may well be that there is some neural disease that explains Tiffany Sitton’s hallucinations. But if so, then it’s incumbent on those who propose that explanation to give a description of the disease, its etiology, and its causes, and to give some evidence that Tiffany Sitton has it. For the reasons I explained, just saying “schizophrenia” doesn’t count as such giving such a description. “Schizophrenia” is defined in such a way that that does no more explanatory work than if you had said, “Tiffany Sitton has hallucinations because she has the hallucination-causing disease.”

My point remains that seeing spiders that aren’t there is not, as Caplan claims, merely “bad behavior.” Do you, or Szasz, disagree?

This is a crude strawman. Caplan doesn’t claim that having hallucinations is “bad behavior.” If you think that he has, you have misread him very badly. What he suggested is that “schizophrenia is a linguistic excuse for bad behavior.” Again, the issue here is the use of the category “schizophrenia,” not the specific experiences that she reports having. What he’s challenging is the use of a psychiatric diagnosis to excuse specific behaviors (e.g. drug abuse and inflicting emotional suffering on her mother). Not the claim that she really does have hallucinations about spiders.

Scheule: Even if one girl lies about hearing demons, it’s nonsense to believe this explains the entirety of diagnosed schizophrenics.

I can’t vouch for Caplan’s views, but certainly Thomas Szasz has never claimed anything of the sort.

Scheule: Alternatively, Caplan thinks the girl is telling the truth but doesn’t want to call it a disease–but c’mon, she feels non-existent spiders itching around subdermally. If that’s not an illness, please, what is?

Smallpox is a disease. Feeling non-existent spiders itching around under your skin is a hallucination, not a disease.

Depending on the breaks, the hallucination may be a symptom of some identifiable neural disease. Or it may not be. Lots of well-defined neuropathologies can result in hallucinations, such as Parkinson’s disease, or brain tumors, or for that matter the syndromes that result from certain kinds of drug abuse. But lots of unpleasant things can also happen to your body without being to anything that you could call a “disease.” If you intend to bring in the medical model, it’s up to you to explain what the disease actually is and produce some evidence that it’s present in this case.

You might say, “Oh, well, the disease here is schizphrenia.” But just referring back to a term explicitly defined through a grab-bag of loosely-related symptoms, rather than in terms of etiology, doesn’t cut much ice. Since schizophrenia is defined in terms of things like the experience of hallucinations, citing it as the explanation for hallucinations is either tightly circular, or at best an unbacked promissory note for a physiological explanation, rather than the explanation itself. It’s hard for me to see what function, if any, pseudomedical terms like “schizophrenia” serve in helping us to understand what’s going on with someone like Tiffany Sitton.