The thing about that Selby extract worth noting is how he makes it clear who's saying what by establishing context. It's obvious because during the setup he established each view point, so each line only makes sense to a specific character.
I respectfully disagree. It is very annoying to the eye to have two speakers in the same paragraph. I haven't read that book so I'll give you the benefit of the doubt there, but usually non-separated speaking is a sure sign of an amateur.
Across the spectrum of the arts, it's said (rightfully) that the tricks of the master closely resemble the mistakes of the amateur, the difference being that the amateur doesn't know how to make them work and does it out of ignorance, while the master fully understands the 'rules' and how they work together. But you can't transcend the rules until you know them.
In writing rules, you're usually correct. However, not separating out spoken bits is really annoying, and is very likely to get me to put the book down.
Absolutely. Whenever I read the black and white interpretation of 'rules' on this forum I get a bit frustrated because many great writers have become so not only because they broke the rules, but changed them. If everyone always stuck to the 'rules' of writing, we'd still be writing epic poems. Rules are guidelines for amateurs to lead them in the right direction, and also set the path for safe, effective writing. Following the known path is safe, gets you where you need to go, and doesn't do anything surprising. But it's the explorers that head into the unknown, who may fail and fail and fail and hit dead ends constantly, that eventually discover new and exciting things.