Use Setup.hs like everyone else does

and note the issue about custom vs simple build-type for Cabal itself.

DefaultSetup.hs

@@ -1,3 +1,2 @@
-module Main where
 import Distribution.Simple
 main = defaultMain

Makefile

@@ -28,7 +28,7 @@ all: build
 
 setup::
 	mkdir -p dist/tmp
-	$(HC) $(GHCFLAGS) -i. -odir dist/tmp -hidir dist/tmp Setup.lhs -o setup
+	$(HC) $(GHCFLAGS) -i. -odir dist/tmp -hidir dist/tmp Setup.hs -o setup
 
 Setup-nhc:
 	hmake -nhc98 -package base -prelude Setup

Setup.hs

@@ -0,0 +1,10 @@
+import Distribution.Simple
+main :: IO ()
+main = defaultMain
+
+-- Although this looks like the Simple build type, it is in fact vital that
+-- we use this Setup.hs because it'll get compiled against the local copy
+-- of the Cabal lib, thus enabling Cabal to bootstrap itself without relying
+-- on any previous installation. This also means we can use any new features
+-- immediately because we never have to worry about building Cabal with an
+-- older version of itself.