Why don't we just let miners to decide the optimal block size?
If a miner is generating an 1-GB block and it is just too big for other miners, other miners may simply drop it. It will just stop anyone from generating 1-GB blocks because that will become orphans anyway. An equilibrium will be reached and the block space is still scarce.
I think this is exactly the right thing to do.
There is still the question of what the default behavior should be. Here is a proposal:
Ignore blocks that take your node longer than N seconds to verify.
I'd propose that N be: 60 seconds if you are catching up with the blockchain. 5 seconds if you are all caught-up. But allow miners/merchants/users to easily change those defaults.
Rationale: we should use time-to-verify as the metric, because everything revolves around the 10-minutes-per-block constant.
Time-to-verify has the nice property of scaling as hardware gets more powerful. Miners will want to create blocks that take a reasonable amount of time to propagate through the network and verify, and will have to weigh "add more transactions to blocks" versus "if I add too many, my block will be ignored by more than half the network."
Time-to-verify also has the nice property of incentivizing miners to broadcast transactions instead of 'hoarding' them, because transactions that are broadcast before they are in a block make the block faster to verify (because of the signature cache). That is good for lots of reasons (early detection of potential double-spends and spreading out the verification work over time so there isn't a blizzard of CPU work that needs to be done every time a block is found, for example).
This rule would apply to blocks until they are 1 deep, right? Do you envision no check-time or size rule for blocks that are built on? Or a different much more generous rule?