Partly true, partly false. VS Code is FOSS (MIT license). The VS Code binary that Microsoft distributes is freeware (proprietary license).
> and neither is this extension
Correct.
> That's just proprietary, software plain and simple.
Indeed, the Pylance extension is proprietary software.
> In the way that third-party distributions of VSCode do not come with the same rights to extend the software or use it in combination with compatible extensions
False. Third party distributions of VSCode can absolutely use compatible extensions. The license of certain proprietary extensions does not allow you to use them with third party distributions of VSCode.
> It's not that your modified copies must give your users the same rights to inspect and modify the code as you had (that's copyleft) but that you are unable to give them such rights. MS does this not entirely through the licensing of VSCode but also through the licensing of certain extensions
The VSCode license prevents you from reverse engineering, modifying it, and you agree to send some telemetry to Microsoft. You're correct that the MS distribution is not FOSS. It's the same with Chrome (the code base) and Chrome (the browser binaries that Google distributes).
> Neither VSCode nor this extension is open-source.
Again, to be clear: VSCode (the binary) is not OSS, but the source code used to build VSCode (the binary) *is* OSS. Pylance (the extension) is straight up proprietary software.
> Note that these are not definitions in the ordinary lexographical sense. They are terms that were created with explicit social and technical purposes in mind, by and for organized movements. This isn't an argument from the dictionary but a reminder of the purposes of these concepts.
The MIT license represents a different view on the social and technical goals of open source software. It's much simpler than the GPLs and only has one obligation for the user/redistributors: display a copyright notice. It's not as copyleft as the GPLs.