Sometimes in the play, the word has more than one meaning -- for instance in the nunnery scene when Hamlet asks Ofelia whether she's honest, the word means both chaste and truthful and as such they talk past each other, another kind of an escaped truth.
But mostly it is used as a way of exploring our willful human tendency to think of lying as casual or benign or an acceptable means to an end -- how this comprises the first biggest lie we tend to tolerate -- the lie to ourselves -- and how from there it just gets easier. The play relentlessly looks at how not facing up to the rottenness in the state of things affects every aspect of our existence until that impurity is purged and burnt away. (This is also why Corambis's admonishment, "To thine own self be true" must be given due respect by Leartes and Ofelia. It makes Shakespeare's central point and keeps Corambis from being a complete buffoon, which would obfuscate Ofelia and Leartes' grief at his death.)
One of Shakespeare's most stinging commentaries on this question of honesty, as Annie O also points out, is making Hamlet's choice for putting on an "antic disposition" simply to be honest, because to be totally honest in a so-called civilized society is to be insane. But that's just the beginning.
The entire play is comprised of one lie, deception, spying or eavesdropping episode, betrayal and denial after another. And it is the abandonment of honesty that does these characters in -- in some cases because lying comes too easily (R&G, Corambis, Leartes, Gertred, King), in the most devastating case because lying to the one you love is simply impossible to live with (Ofelia) and, then, in Hamlet's case... because it's... what?... Well, there is centuries of scholarship exploring that question. But maybe it has to do with erring too righteously on the other end of that spectrum.
There is a wonderful chapter in Kenneth Chan's book, Quintessence of Dust: The Mystical Meaning of Hamlet that explores the theme of fundamental self-deception in the play. He delineates three kinds of lies:
• Our lack of honesty in facing up to the truth.A revelation to me was how Chan explains Hamlet writing down, "That one may smile and smile and be a villain" as an example of the second point above:
• Our tendency to artificially beautify reality in order to conceal the truth.
• Our tendency to be false to others because of our failure in being true to ourselves.
"In the midst of Hamlet's intense emotional distress, upon being informed of his father's murder, he suddenly has the need to write down the line "That one may smile, and smile, and be a villain," and actually does so. This noticeably jolts the flow of the action. This strange action of Hamlet is, however, deliberately designed to alert us to the recurring motif: our propensity to artificially beautify things to conceal its rotten core, here represented by the King's amiable smiling appearance that actually conceals a murderer."A darker example is the reference to Ofelia's make-up in the nunnery and graveyard scenes: "Now go to my lady's chamber and bid her paint herself an inch think, to this she must come."
Which brings me to the most prominent self-deception that Shakespeare explores in Hamlet. This being, as Chan points out,
"our lack of honesty in facing up to the inevitability of death, and to the profound truths in life. Throughout the play, we are constantly assailed with harsh references to death and its inevitability. No other play by Shakespeare comes remotely close to Hamlet in its endless and remorseless references to death. It is as though Shakespeare is subjecting us to a form of shock treatment designed to shake us out of our denial of its truth."The Ghost scenes, None lives on earth but he is born to die, To be or not to be, Ofelia's drowning (she denies she's in trouble), the graveyard scene, and on.
It's as though he were saying that our failure to face our mortality head on is at the root of all our other deceits.