In a short story, our words are limited, so we must craft our prose to convey a sense of naturalness. Scenes have an arc of rising and ebbing action, so let’s consider how conversation fits into the arc of the scene.
J.R.R. Tolkien said that dialogue must have a premise or premises and move toward a conclusion of some sort. If nothing comes of it, the conversation is a waste of the reader’s time.
What do we want to accomplish in this scene? Ask yourself three questions.
- Who needs to know what?
- Why must they know it?
- How many words do you intend to devote to it?
My rule of thumb is, keep the conversations short and intersperse them with scenes of actions that advance the plot.
Author James Scott Bell says dialogue has five functions:
- To reveal story information
- To reveal character
- To set the tone
- To set the scene
- To reveal theme
So now that we know what must be conveyed and why, we find ourselves in the minefield of the short story:
- Delivering the backstory.
Don’t give your characters long paragraphs with lines and lines and lines of uninterrupted dialogue. A short story has no room for bloated exposition.
Let’s look at a scene that opens upon a place where the reader and the protagonists must receive information. The way the characters speak to us can take several forms:
- Direct discourse. Nattan said, “I was going to give it to Benn in Fell Creek, but he wasn’t home, and I had to get on the road.”
- Italicized thoughts: Nattan stood looking out the window. Benn’s not home. What now?
- Free indirect speech: Nattan stood looking out the window. Benn wasn’t home, so who should he give it to?
Examples two and three are versions of indirect speech, which is a valuable tool in your writer’s toolbox
Wikipedia describes free indirect speech this way:
Free indirect speech is a style of third-person narration which uses some of the characteristics of third-person along with the essence of first-person direct speech; it is also referred to as free indirect discourse, free indirect style, or, in French, discours indirect libre.
Free indirect discourse can be described as a “technique of presenting a character’s voice partly mediated by the voice of the author” (or, reversing the emphasis, “that the character speaks through the voice of the narrator”) with the voices effectively merged. This effect is partially accomplished by eliding direct speech attributions, such as “he said” or “she said”.
The following is an example of sentences using direct, indirect and free indirect speech:
- Quoted or direct speech: He laid down his bundle and thought of his misfortune. “And just what pleasure have I found, since I came into this world?” he asked.
- Reported or normal indirect speech: He laid down his bundle and thought of his misfortune. He asked himself what pleasure he had found since he came into the world.
- Free indirect speech: He laid down his bundle and thought of his misfortune. And just what pleasure had he found, since he came into this world?
According to British philologist Roy Pascal, Goethe and Jane Austen were the first novelists to use this style consistently and nineteenth century French novelist Flaubert was the first to be consciously aware of it as a style. 
When I began writing seriously, I was in the habit of using italicized thoughts and characters talking to themselves as a way to express what was going on inside of them.
That isn’t necessarily wrong. When used sparingly, thoughts and internal dialogue have their place. When they are used as a means for dumping information, they can become a wall of italicized words.
In the last few years, as I’ve evolved in my writing habits, I am drawn more and more to the various forms of free indirect speech as a way of showing who my characters think they are and how they see their world.
The main thing to watch for when employing indirect speech in a short story is to stay only in one person’s head. Remember, short stories are limited for space, so it’s essential to only tell the protagonist’s story.
In longer pieces, such as novels, you could show different characters’ internal workings provided you have clear scene or chapter breaks between each character’s dialogue.
If you aren’t careful, you can slip into “head-hopping,” which is incredibly confusing for the reader. First, you’re in one person’s thoughts, and then another—it’s like watching a tennis match.
When you are limited in word count, you must find the most powerful ways to get the story across with a minimum of words. Showing important ruminations as an organic part of the unfolding plot is one way to give information and reveal a character while keeping to lean, powerful prose.
Credits and Attributions:
 Wikipedia contributors, “Free indirect speech,” Wikipedia, The Free Encyclopedia, https://en.wikipedia.org/w/index.php?title=Free_indirect_speech&oldid=817276599 (accessed March 30, 2021).