Le Guin's novel is heavily influenced by Taoism, an Eastern religion characterized in the West by "go with the flow." It is based on a philosophy of "non-action" that believes in living in harmony with nature and the chi, or energy of the universe. In essence, speaking metaphorically, you let the water of the universe's energy carry you where you need to go, rather than try to swim against the tide.
Le Guin uses Taoist quotes by ancient Taoist Chuang Tse as chapter heads, such as those that start chapters II and XXIII:
Confucius and you are both dreams, and I who say you are dreams am myself a dream. This is a paradox. (II)
Those whom heaven helps we call the sons of heaven. They do not learn by learning. They do not work by working. They do not reason by using reason. To let understanding stop at what cannot be understood is a high attainment. Those who cannot do it will be destroyed upon the Lathe of Heaven. (XIII)
Chuang Tse is also famous for saying he dreamed he was a butterfly, and when he awoke, wasn't sure if he were a man who had dreamed of being a butterfly a butterfly who dreamed of being a man.
This questioning of what is dream and what is reality is at the heart of Le Guin's novel. Main character George Orr, who represents the Taoist worldview, has the power to dream new realities into existence. For instance, he rids the world of racism by dreaming everyone to the same pale gray skin. However, as the novel progresses, we become increasingly unsure what is a dream and what is reality as dreams and realities multiply—and much goes awry.
Unfortunately, this is because Orr dreams dreams, at the behest of Dr. Haber, that attempt to fix the world. Dr. Haber represents Western rationalism and the principle of making everything "better." All his attempts to engineer "improvements" through Orr's dreams, however, bring unintended consequences that make things worse.
Le Guin thus uses Eastern religion and philosophy to question Western notions of reality and "improvement." The novel suggests that the Tao "Way" of non-action and going with the flow of the universe, rather than Western rationalism and utilitarianism, which is the idea of the greatest good for the greatest number, is the better way to live.