Dreaming (D-state or D-activity) is associated with a special movement of eyes, under closed eyelids, called Rapid Eye Movement (REM). It is also associated with changes in pattern of electrical activity of brain (EEG). A dreaming person has pattern of someone who is wide awake and alert. This seems to sit well with a theory of dreams as active therapists, engaged in arduous task of incorporating new (often contradictory and incompatible) information into an elaborate personal model of self and reality that it occupies.
There are two types of dreams: visual and "thought-like" (which leave an impression of being awake on dreamer). The latter happens without any REM cum EEG fanfare. It seems that "model-adjustment" activities require abstract thinking (classification, theorizing, predicting, testing, etc.). The relationship is very much like one that exists between intuition and formalism, aesthetics and scientific discipline, feeling and thinking, mentally creating and committing one's creation to a medium.
All mammals exhibit same REM/EEG patterns and may, therefore, be dreaming as well. Some birds do it, and some reptiles as well. Dreaming seems to be associated with brain stem (Pontine tegmentum) and with secretion of Norepinephrine and Serotonin in brain. The rhythm of breathing and pulse rate change and skeletal muscles are relaxed to point of paralysis (presumably, to prevent injury if dreamer should decide to engage in enacting his dream). Blood flows to genitals (and induces penile erections in male dreamers). The uterus contracts and muscles at base of tongue enjoy a relaxation in electrical activity.
These facts would indicate that dreaming is a very primordial activity. It is essential to survival. It is not necessarily connected to higher functions like speech but it is connected to reproduction and to biochemistry of brain. The construction of a "world-view", a model of reality is as critical to survival of an ape as it is to ours. And mentally disturbed and mentally retarded dream as much as normal do. Such a model can be innate and genetic in very simple forms of life because amount of information that needs to be incorporated is limited. Beyond a certain amount of information that individual is likely to be exposed to daily, two needs arise. The first is to maintain model of world by eliminating "noise" and by realistically incorporating negating data and second is to pass on function of modelling and remodelling to a much more flexible structure, to brain. In a way, dreams are about constant generation, construction and testing of theories regarding dreamer and his ever-changing internal and external environments. Dreams are scientific community of Self. That Man carried it further and invented Scientific Activity on a larger, external, scale is small wonder.
Physiology also tells us differences between dreaming and other hallucinatory states (nightmares, psychoses, sleepwalking, daydreaming, hallucinations, illusions and mere imagination): REM/EEG patterns are absent and latter states are much less "real". Dreams are mostly set in familiar places and obey laws of nature or some logic. Their hallucinatory nature is a hermeneutic imposition. It derives mainly from their erratic, abrupt behaviour (space, time and goal discontinuities) which is ONE of elements in hallucinations as well.
Why is dreaming conducted while we sleep? Probably, there is something in it which requires what sleep has to offer: limitation of external, sensory, inputs (especially visual ones hence compensatory strong visual element in dreams). An artificial environment is sought in order to maintain this periodical, self-imposed deprivation, static state and reduction in bodily functions. In last 6-7 hours of every sleep session, 40% of people wake up. About 40% - possibly same dreamers report that they had a dream in relevant night. As we descend into sleep (the hypnagogic state) and as we emerge from it (the hypnopompic state) we have visual dreams. But they are different. It is as though we are "thinking" these dreams. They have no emotional correlate, they are transient, undeveloped, abstract and expressly deal with day residues. They are "garbage collectors", "sanitation department" of brain. Day residues, which clearly do not need to be processed by dreams are swept under carpet of consciousness (maybe even erased).
Suggestible people dream what they have been instructed to dream in hypnosis but not what they have been so instructed while (partly) awake and under direct suggestion. This further demonstrates independence of Dream Mechanism. It almost does not react to external sensory stimuli while in operation. It takes an almost complete suspension of judgement in order to influence contents of dreams.
It would all seem to point at another important feature of dreams: their economy. Dreams are subject to four "articles of faith" (which govern all phenomena of life):
Homeostasis - The preservation of internal environment, an equilibrium between (different but interdependent) elements which make up whole. Equilibrium - The maintenance of an internal environment in balance with an external one. Optimization (also known as efficiency) - The securing of maximum results with minimum invested resources and minimum damage to other resources, not directly used in process. Parsimony (Occam's razor) - The utilization of a minimal set of (mostly known) assumptions, constraints, boundary conditions and initial conditions in order to achieve maximum explanatory or modelling power. In compliance with above four principles dreams HAD to resort to visual symbols. The visual is most condensed (and efficient) form of packaging information. "A picture is worth a thousand words" saying goes and computer users know that to store images requires more memory than any other type of data. But dreams have an unlimited capacity of information processing at their disposal (the brain at night). In dealing with gigantic amounts of information, natural preference (when processing power is not constrained) would be to use visuals. Moreover, non-isomorphic, polyvalent forms will be preferred. In other words: symbols that can be "mapped" to more than one meaning and those that carry a host of other associated symbols and meanings with them will be preferred. Symbols are a form of shorthand. They haul a great amount of information most of it stored in recipient's brain and provoked by symbol. This is a little like Java applets in modern programming: application is divided to small modules, which are stored in a central computer. The symbols generated by user's computer (using Java programming language) "provoke" them to surface. The result is a major simplification of processing terminal (the net-PC) and an increase in its cost efficiency.