I guess it all has to do with experience -
That is, to know what to say, and what to do, in a social situation.
A lot of people have a variety of social experiences to draw their social repertoire from. Also from very early on in their life (almost from their birth), they have had the chance to observe and model / copy others in how to behave socially (and the social 'encouragement' to do so). I guess this is also the way in which 'culture' in general is passed on, rather 'effortlessly' and 'naturally', between generations.
In my view the following is how people 'think of what to say' in a social situation: They make extremely fast, 'calculations' if one may put it, in their subconscious of what to say. That is, what is appropriate to say, given the setting, the other person(s), the relationship, the context. This is done very fast with minimal 'conscious' thinking involved. Given the above variables, one's mindset, one's grasp of language, and in some respects, one's intention... words come out conjured and weaved together effortlessly and naturally. Language truly is a wondrous thing indeed, and a very intrinsic human faculty.
Like everything else in life, the degree of such 'automation' I guess corresponds to the degree of skill and experience. When we first learn to do a new activity - be it learning to bike, to swim, to play tennis, whatever - we initially have to think very consciously about every little movement we make, every little thing to do, what to do next, whether we did it correctly... and so on. But as we learn, certain things are 'grasped', and are relegated to automation. My guess is social skills and "knowing what to say" work much the same way.
Oh yes, and how could I forget creativity. To 'think of what to say' in the very short time we have in a conversation (down there in the millisecond range), we must have very good creativity. Sure, previous experience helps us immensely in preparing us with certain stereotyped responses, (and more generally in the 'ways' to respond / say things) but that cannot discount the huge role of creativity.
To 'conjure up', out of... 'nothing', something that is relevant, appropriate and 'interesting' - how can things get more creative than that? Yet this is what one must do in any conversation. To have a mind that can search through the recesses of one's memory and experience extremely quickly, and synthesise the right thing to say - in milliseconds. I mean, it pretty much has to be 'automatic'. And yes, I daresay, like riding a bike, reading a book - this is indeed a skill. One has to be creative to have a conversation.
And yes... this all reminds me of how human intelligence, and language for that matter, evolved in the first place: For social purposes. For as you can see, language and creativity are absolutely integral in developing human social relations, with all its complexity.
No. Sadly, human intelligence didn't evolve to make us better tool-users and wield technology. These were merely 'side-effects'. Nor was it evolved for 'academic' learning. This was a side-effect too. It evolved to... so-called 'enrich' our social interactions. Just as the peacock gradually evolved its marvellous tail to 'look nice' to females, humans gradually evolved 'intelligence' to embellish and decorate their social interactions; including language and creativity. Of course, it has had immense side-effects; but alas, to this day, such things remain as side-effects to the grand social theme.
