In other words, dialogue should contain subtext as well as text.
Dialogue should not just advance the plot. Speech between characters reveals "emotion within a logical structure," and its purpose in fiction "is never merely to convey information...but it needs simultaneously to characterize, provide exposition, set the scene, advance the action, foreshadow, and/or remind" --Janet Burroway, WRITING FICTION.
And dialogue has to sound like real conversation, although, as Prose mentions in her book, dialogue in fiction is better than "real" dialogue. Fictional dialogue should be an improved, cleaned up, compressed, economical, and smoothed-out version of the way people talk. And yet, it should sound "natural."
Even rote exchanges can call up images. From Burroway: A character who says, "It is indeed a pleasure to meet you" carries his back at a different angle, dresses differently, from a character who says, "Hey, man, what's up?"
What is NOT said is as revealing as what IS said. People in crisis are often at their least articulate. Burroway again: "Dialogue can fall flat if characters define their feelings too precisely and honestly, because often the purpose of human exchange is to conceal as well as to reveal..."
I often recommend students who write fiction (and nonfiction) read poetry to feed their heads with imagery and the power and economy of each word, each line. With dialogue, reading plays helps--screenplays, too. Of course, that's in addition to reading pitch-perfect dialogue from writers such as Charles Portis, who, in his novel, NORWOOD, manages to tell us volumes of information on his characters--their education, background, motivations-- with a few lines of dialogue (and no heavy dialect). Take this exchange, which happens just three pages into the novel:
Norwood Pratt, an ex-marine, is heading back home to Texas on a bus:
...when he awoke he struck up a conversation with a friendly young couple name of Remley. The Remleys had been picking asparagus in the Imperial Valley and were now on their way home with their asparagus money. Traveling with them was their infant son Hershel. Hershel was a cheerful, bright-eyed little fellow. He was very well behaved and Norwood remarked on this.
Mrs. Remley patted Hershel on his tummy and said, "Say I'm not always this nice." Hershel grinned but said nothing.
"I believe the cat has got that boy's tongue," said Norwood.
"Say no he ain't," said Mrs. Remley. "Say I can talk aplenty when I want to Mr. Man."
"Tell me what your name is," said Norwood. "What is your name?"
"Say Hershel. Say Hershel Remley is my name."
"How old are you, Hershel? Tell me how old you are."
"Say I'm two years old."
"Hold up this many fingers," said Norwood.
"He don't know about that," said Mrs. Remley. "But he can blow out a match."
Norwood talked to Mr. Remley about bird hunting. Mrs. Remley talked about her mother's people of near Sallisaw. Hershel made certain noises but said no words as such. Mrs. Remley was not bad looking. Norwood wondered why she had married Mr. Remley. One thing, though...he knew about bird dogs.