Wednesday is a socially constructed concept. There is no such object as Wed. in the natural world. That doesn't mean that we can arbitrarily decide that it is not Wed. Social constructions are very strong in this sense. When I say that it is a fact that today is Wed., I am pretty sure of myself. I could make a mistake, for example during a vacation I might lose track of what day it really is, but that's the exception that proves the rule.
Literature is also socially constructed, but in a more profound way. Once again, there is no object out there called literature. It is a category, not a set of objects. Who gets to decide what gets called literature? We do. There is no God of literature who tell us what it is; rather, it is the collective decision of people who use that category.
Let's look at some definitions.
"written works, especially those considered of superior or lasting artistic merit: a great work of literature.
• books and writings published on a particular subject: the literature on environmental epidemiology.
• leaflets and other printed matter used to advertise products or give advice."
Let's take the first one, because the others are clearly different meanings of the same word.
*The first idea we have about literature, is that it should be written. The idea of "letras" or "letters" is at the heart of the matter. Yet I don't think anyone seriously believes that works of a primarily oral nature do not belong to the general category we are talking about. A few dumb journalists might think this, but nobody who has contemplated the problem for more than a few hours.
*The second idea we have about literature is that it has to be good to count as part of the category. In other words, bad plays or poems are not "literature," only good ones. This is very strange, since categories like this are usually not honorific. I guess colloquially we can say: "You call that breakfast!"[Where the breakfast is a badly cooked one.] I was always puzzled by the idea of "literary fiction" because all fiction [prose narrative] is literary. It might not be good, but it is literature. But since we are talking about a social construction, we have to look at the way people decide to construct it, and that honorific term is certainly part of it. If I said I was a drummer and you hired to play on my record, and I give you an incompetent rhythm track... you wouldn't be very happy if I said: "Well, I never said I was a good drummer." In order to fulfill the drumming function it has to be good drumming, in a certain sense.
*A third idea is that idea of "fiction" itself. The idea is that the essence of the literary is it made-up quality. So a science fiction novel set in the future does not describe reality, and even a confessional lyric constructs a fictional self. I'm not sure that's a defining concept, because a lot of things that are literary aren't primarily defined by it, but we have to recognize that it is part of the way we construct literature socially, despite the rise of "creative non-fiction."
*A fourth idea is that if it's non-fictional, it has to be even better written. In other words, the absence of one "literary" element means there has to be some compensation. So a diary, or essay, or lyric poem, or real-life letter is literary if it is good enough, whereas a pulp fiction potboiler is literary because it is made up. Other things are literary because they seem to aspire to the honorific quality, even if they aren't actually good. So a middle-brow "literary" novel (not genre fiction) is literary like a Mary Oliver poem is. It may be crap but it wears its literariness on its sleeve.
Since these ideas about literature are shifting, there is no such thing as literature: only shifting frames of reference. We don't have the same conception as obtained in previous centuries.
So the Nobel prize in literature is a prize in nothing in particular. There isn't the consensus we have about Wed, even.
Let's look at the case of Bob Dylan. The easiest objection to rebut is the idea that his art is mostly musical and oral, and hence not literary. But everyone knows that literature derives from something that used to call "poetics" and that lyric poetry, sung to the lyre and in modern times the guitar, is a major genre. Musically, Dylan is not that great. He can't sing, is an average guitar player, and I don't think his melodies are great. If you gave him an award for music (and in fact he's won many awards) nobody would object that his actual achievement is in the words. But it would be true. That is his strong point for most who admire him.
The second objection is that he simply is not good enough. This is fine, if you really believe he is not that great a writer. But I fear that there is a confusion here. The idea he is not good enough also stems from the fact that he belongs to a world that people have constructed as music, or entertainment, or pop culture. But those are just categories too, right?