My first impression is that your question "Could not the entire world be a dream, as some have thought?, is found in chapter 5 as the view of absolute idealism, "The whole world seems a dream". This makes sense to me when you observe as experience this statement,"If the things of our experience were "mental pictures", then our everyday life would be like a dream, and the discovery of the true state of affairs would be like waking." I find each day a battle to wake up from daytime dreaming. It is true that the entire world can be a dream but we can waken out of it. I have noticed those moments where I snap out of it after a part of the day drifts by in unconsciousness thinking old thoughts and following habitual routines. It is like slapping your self in the face and waking up to a more alert and conscious state where you get more new insights about what you are doing and try new things.

In chapter 2, I see the extreme one-sided spiritualist who may meditate in a cave and reads books about abstract spiritual worlds or pure principles but never applies anything to real life. So they live in a duality between the spiritual and the material. They speak eloquently about spiritual things but are poor materially and are not able to make anything happen in the world. They may not admit it but they believe all that matters is the spiritual mind and the outer world doesn't matter so getting involved in the world is just to be distracted by the illusional foolishness of the activist. The outer world is just a reflection of the inner world so focus within rather than waste your effort in the world. They don't start new initiatives other than study groups and if they have a car it is likely old. Or they may be able to make money as an academic teaching. Eastern monks are often this way. One fanatical Eastern group walks around naked and must be fed by hand by volunteers or they will starve. Chapter 2 features one-sidedness in world views, the advantages and disadvantages.

From chapter 5 study page: 

Topic 5.0: Knowledge Of Causes Independent Of Us

Critical idealist: Someone who believes that the whole perceived world is only an imagined one, a mental picture, and is in fact the effect upon my soul of things unknown to me.

• The real problem of knowledge then is not concerned with the mental pictures present only in the soul but with the things which are independent of us and lie beyond our consciousness.
• From this point of view, he is not concerned with the inner connection of his conscious percepts but only with their non-conscious causes which exist independently of him.
• If we do not see the things themselves but only their reflections, then we must learn indirectly about the nature of things by drawing conclusions from the behavior of the reflections.

Two critical idealist points of view:

• Absolute illusionism: I am confined to the world of my mental pictures and cannot escape from it. If I think of a thing as being behind my mental picture, then this thought too is nothing but a mental picture. The whole world seems a dream, in the face of which all striving for knowledge is simply meaningless.
• Transcendental realism: For others who feel entitled to argue from mental pictures to things, learning will consist in the investigation of these "things-in-themselves."

Topic 5.1: Indirectly Investigate Real Ego

Transcendental realism: How does the Ego produce the world of mental pictures out of itself? Convinced that the given world consists of nothing but mental pictures, his interest switches from this world to indirectly investigating the real soul which lies behind.

Illusionism: Denies altogether the existence of an Ego-in-itself behind the mental pictures, or at least holds this Ego to be unknowable.

If the things of our experience were "mental pictures", then our everyday life would be like a dream, and the discovery of the true state of affairs would be like waking.

• Night time sleep state: Night time dreams.
• Day time awake state: See through our night time dreams and refer them to the real relations of things, dreams caused by physical, physiological and psychological processes.
  
  • Perceiving dream state: “Waking conscious life” dreaming.
  • Thinking awakened state: See through our waking conscious life dreams and refer them to the real relations of things.

Thinking (awakened from day time dream state), is related to mere perceiving (day time dreaming), in the way that our waking experience (awaken from night time sleep state), is related to our dreaming (night time dreaming).

Topic 5.2: Assert results of thinking

Naive person: Accepts life as it is, and regards things as real just as they present themselves in experience.

• The first step beyond this naïve standpoint is to ask: "How does thinking relate to perception?"
• Between a percept and any kind of assertion about it there intervenes an act of thinking.

Hi Richard,

For me the telling part of the paragraph you are referring to in Chapter 2 is the last sentence:

As little as it is possible for the materialist to argue the spirit away, just as little is it possible for the spiritualist to argue away the outer world of matter.

Steiner is challenging us to have a go at this ourselves if we don't agree.  Just try and argue away the outer world of matter.  Really do it so that you yourself are totally convinced and can then convince us!

I note for example that you use dreams as a starting point for your pondering... could not the entire world be a dream, as some have thought...  this touches on very profound truths but in the context of this particular paragraph I think it's important to note that even dreams are drawn from the content of our sense-perceptible experience in the external world...  so for example, if that tree I see over there is really only a dream of the spirit then in what sense is that meant?  Does that mean that I can learn nothing by observing and reflecting on that tree?

Does it mean nothing, as Steiner says earlier in the chapter, that I experience a "fundamental desire for knowledge" when, for example, I see the tree one time at rest, another time in motion?

My experience of this part of the book is, If I am looking for a practical and truthful starting point for my reflection and investigation (which I believe Steiner is helping me to do here) then I can find for myself through following the train of thought presented in Chapter 2 that I can't do away with either side of the polarity (spirit or matter, I or world, thinking or observation) without laming my thinking and making it one-sided - either overemphasising the phenomenal world of matter as materialists do, or devaluing it and ignoring it as much as possible as spiritualists do. 

As an idea the latter seems nice, but just try and think it out completely and in detail and see what conclusion you come to for yourself!  Perhaps you'll find that you're taking the ground out from under yourself, figuratively speaking!  Or even try living the idea as completely as you can it for a while and see where that leads...

That said, to reiterate personally I believe that the thought could not the entire world be a dream, as some have thought...  still points to profound and important truths.  It's just in this context I believe Steiner is helping us overcome the shadow side, as it were, of this statement which can lead us away from truthful and grounded thinking.

Well, I am grateful for all the detailed & encouraging responses I've had to my question. There is much to think about here. I have found some of my problem dealt with in chapter five, as Tom has pointed out.