We are considering Zhuangzi's butterfly dream in the context of Dan Lusthaus's discussion in "Aporetics Ethics in the Zhuangzi" (Hiding the World in the World). So far, the point has been made that Zhuangzi's awakened condition wherein he is aware of having dreamt he is a butterfly who was unaware of a Zhuangzi is to be preferred over the latter. It is through doubtfulness that we release into mystery.
However, Lusthaus goes a step further and, if I understand him aright (I find his arguments difficult to follow), suggests that the forgetful experience of the carefree butterfly represents Zhuangzi's ‘purported’ ideal condition which he now dismisses as just more dreaming. "This story treats the 'philosophy' of Zhuangzi with deep irony."
I have two problems with this idea that this story it is a negation of the Zhuangzian ideal condition as typically understood, that is as carefree wandering. The first is that there seems to be a straw man in here; for although the butterfly does in many ways suggest the Zhuangzian ideal, it lacks the essential awareness of the dreaming which also typifies Zhuangzi's sage, and thus cannot be said to truly represent that ideal. The dismissal of the butterfly, therefore, is not a dismissal of Zhuangzi's ideal condition, but of its misrepresentation. That Zhuangzi's ideal condition is itself a dreaming has never been in dispute; if it was ever thought to be anything else, then it has failed to abide in 'not-knowing'. The point is to awaken to the dreaming, not from it. Zhuangzi is perfectly happy to admit that his way is but another way of dreaming, albeit a happier one.
Secondly, there is always a danger in getting too pedantic with this text; this is not scripture, and every jot and tittle need not be so over-analyzed that they can overturn the larger meaning of a passage, or as here, the entire Inner Chapters. A. C. Graham comments on how Zhuangzi seems to have been one of the first philosophers to compose on his feet. This is not a well-laid-out treatise, where each word is carefully chosen and every possible implication considered, but a spontaneous expression of his thought, as messy as life itself.
You can check out Scott's writings on Zhuangzi here.