1. Isn't this going down the Russell path of a set containing itself?
2. The empty set has been defined as the set with no elements, so after all the iterations, where are the elements?
1:
Actually, no. None of these sets contains itself. The set 0 contains nothing, so it certainly does not contain itself. The set 1 contains 0 but it does not contain 1. The set 2 contains 0 and 1 but not 2. And so on. Each set contains all the previously defined ones, but not itself. So in fact NONE of these sets contains itself. Even the infinite ones only contain all the previous sets, but not themselves.
2:
The sets constructed by this process ARE the elements. Nevertheless, no set contains itself, as mentioned above. It is true that you appear to start with nothing at all, and get all these numbers, but in reality this construction is driven by the axioms of set theory. So you aren't really starting from nothing, you are starting from the axioms of the theory. These axioms guarantee that you can put a box around ANYTHING, so long as you can specify exactly what you are boxing. So if you say, "I'll put a box around nothing at all," that is allowed by the axioms. Then you have a box, so you can say, "Now I'll put a box around my first box." and the rules allow this, too. And so on.
Ultimately, you have boxes of boxes of boxes.... The innermost boxes are empty, of course, but they are still
there. I know that this seems rather strange, so look at it by analogy: suppose you owned a company that manufactured boxes. You would pack them into larger boxes to ship. One day, one of your customers complains that you are cheating him, because he paid you for a shipment, but when he opened every box he found, there was nothing inside, so you had shipped him nothing. That complaint would be unreasonable, because after all, you are a box company, and he paid for boxes and got boxes. So boxes of boxes of ... of boxes of nothing, is actually [I\something[/I].
Besides, these sets do have a structure governed by the laws of logic and the axioms of set theory, and this structure is rich enough to host the structure of the integers and their arithmetic. In mathematics, it pretty much doesn't matter what the substrate is that has the structure; the structure is the main object of study. This is not unlike computer programming, in which the actual hardware largely doesn't matter to the programmer. If I write a C code program that prints "Hello world!" I can compile it and run it on pretty much any machine in the world, and it will print "Hello world!" to the screen. The program itself is the same entity regardless of the underlying hardware, and its properties can be studied independently of the machine. In a similar way, mathematical structure can be studied independently of what things have that structure, as long as the structure itself is logically self-consistent.
While we're on the subject of programs, note that if I run the same program on several machines, that doesn't make it several different programs. It is several
instances of the same program. Just because it is currently running on one machine, that is no reason why it cannot also be sitting on a disk somewhere else, too. This is in the nature of abstract objects: as many instances as you want can all be present simultaneously, without the abstract object being more than one thing. The relevance of this to the boxes in set theory, is that once you have put a box around something, you can still have another instance of that same something which is NOT inside that box. This is important, because without it you could not use von Neumann's construction. When you get to 2 = {1,0}, you will recall that 1 = {0}, so the 0 is already "inside 1", and someone might raise the objection that since it is already inside the box, how can it be outside of the box, too? Well, the same way a computer program can be on a disk and running on a computer at the same time. Abstract objects can do that.
Warning: the following is just for fun. It is not good mathematics, just wordplay.
You start with nothing at all.
To make each new number, you box up everything you have so far.
Since you put this box around everything you have, there is nothing outside the box.
But nothing is what you started with.
So you can start with nothing outside the box, and rebuild outside the box everything that was inside it.
So you have the same things both inside and outside the box.
Then you box
that.
But this is just step 2 again, for the next higher number.
Continue forever.
You might want to look at
this link, which describes the process all the way from basic set theory to the construction of the complex numbers in 14 pages.
--Stuart Anderson