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Very interesting set of related issues here.  I'm inclined to agree that indeed " having a name and an understanding of perhaps why they are the way they are has been beneficial" to lots of people.  And, additionally, that it plays an important and necessary role in science, among other social activities.   At the same time, I'm also inclined to agree that labelling can be "a dangerous business." 

The history of "mental illness" diagnosis is a good case in point, and, as noted, a timely one (cf Revising book on disorders of the mind, NYTimes, 10 Feb 2010).  There's pretty good evidence that mental health problems and diagnoses are indeed both contagious  (cf The Americanization of mental illness, Ian Hacking's Mad Travelers, and Ann Harrington's A History of Mind-Body Medicine), and disabling.  At the same time, recognizing differences among people has been and continues to be valuable for many individuals.  

Maybe we could have our cake and eat it too?  Perhaps it isn't "category-making" in and of itself that is a problem but rather some deeper assumptions about the significance of categories.  We might, for example, keep categories, but challenge an assumption that they importantly distinguish between those who "are abnormal" and those who are "normal"."  Categories describe differences, rather than deficiencies relative to some norm?  We might also recognize categories as constructions, always in flux, rather than as definitive descriptions of essential characteristics.  The categories used at any given time are not only temporary but are to be valued to the extent they raise questions and open the possibility of seeing things in ways yet to be imagined?   Perhaps we can keep categories and their desirable features and get rid of their less desirable ones?