I would direct you to Carlos Fuentes' work, The Buried Mirror. In the section where he talks about "El Siglo del Oro," Fuentes explores the impact that Cervantes' work, Don Quixote, holds on the Spanish narrative in literature. One of the points he makes is that Quixote reflects two realities. One distinct expression is the vision of dreams, hopes, and ideals, as represented with Quixote. Another is the banal, daily existence of Sancho. Between both is the modern human being, struggling to straddle both worlds and seeing themselves in these two lights almost simutaneously. It is in this light that Fuentes discusses Velasquez's work. The "picture within a picture" is used to explore what is subject and object. Are the dolls the subject? Is the painter? Is the viewer? In the end, these questions as to where reality is centered occupies the central importance of Fuentes' analysis. Fuentes' analysis is that the technique of "picture within a picture" is one that drives the questioning of consicousness that emerged within the modern setting. The timing of the Golden Age, Cervantes' work, and Velasquez's painting is one where distinct questions about what constitutes modernity and antiquity emerged. Fuentes makes the argument that writers and thinkers of the time period struggled with this question, making them both of their time and outside of it. In this light, Velazquez's painting is one where uncertainty exists, similar to the struggle between past and modernity. The French philosopher Michel Foucault articulated the same idea upon examining the portrait in his own view:
We are looking at a picture in which the painter is in turn looking out at us. A mere confrontation, eyes catching one another's glance, direct looks superimposing themselves upon one another as they cross. And yet this slender line of reciprocal visibility embraces a whole complex network of uncertainties, exchanges, and feints. The painter is turning his eyes towards us only in so far as we happen to occupy the same position as his subject.
It is precisely this analysis of subject/ object, modernity/ antiquity, and dreams/ reality that the "picture within a picture" element of Velazquez's work evokes.