On Zhuangzi's Butterfly Dream

Last night, Chuang Chou dreamed he was a butterfly, spirits soaring he was a butterfly (is it that in showing what he was he suited his own fancy?), and did not know about Chou. When all of a sudden he awoke, he was Chou with all his wits about him. He does not know whether he is Chou who dreams he is a butterfly or a butterfly who dreams he is Chou. Between Chou and the butterfly there was necessarily a dividing; just this is what is meant by the transformation of things. (Graham p. 61)

I. A Twig
Zhuangzi's dreaming of himself as a butterfly is not particularly meaningful in and of itself. The point is to highlight the seamlessness between his dream and his waking; the "dividing" between them is so narrow that he is left confused about which side is the dream and which is the waking. This seamlessness is what he means to point out when he says "just this is what is meant by the transformation of things. That is, the "dividing" between the untransformed and the transformed is imperceptible to he who undergoes transformation, and the one who follows Zhuangzi excels at being comfortably and naturally active in whichever role, without differentiating the two. With ease Zhuangzi passes from waking to dreaming, and dreaming to waking again, taking no notice of the 'necessary' divide between them.

The one who follows Zhuangzi fills, with "spirits soaring", the role into which he finds himself transformed, and marks no difference between them. This is opposite the erudite sage, whose role it is precisely to mark out differences, and emphasize the division between a butterfly and a man.