How to configure self hosted wordpress so that everything can be upgraded/installed from dashboard

This is an issue with your server configuration, not with WordPress. Generally, it means that the server is not configured to use suPHP. (More, via Otto, here and here.)

The (usually simple) solution is to add your FTP information to wp-config.php:

define('FTP_USER', 'username');
define('FTP_PASS', 'password');
define('FTP_HOST', 'ftp.example.org');

Put these in wp-config.php (with your specific information, of course), and you should no longer see the FTP credentials screen.