This is an edited and translated transcript of a lecture by Niklas Luhmann in which he outlined the foundation of his systems theory based on the notion of difference and distinction. After a brief introduction to early theories of distinction, the central ideas of SpencerBrown’s Laws of Form as the most radical form of differential thinking are presented. For Luhmann’s systems theory, this has four important consequences. First, the system is the difference between system and environment. Second, the system can be defined through a single mode of operation. Third, every (social) system observes internally (i.e. within the system) its own system/environment distinction; there is a re-entry of the system/environment distinction into the system. Fourth, every social theory is part of the social domain and as such part of what it describes.