So... I start from "more transactions == more success"
I strongly feel that we shouldn't aim for Bitcoin topping out as a "high power money" system that can process only 7 transactions per second.
Hey, I want a pony too. But Bitcoin is an O(n) system, and we have no choice but to limit n.
I agree with Stephen Pair-- THAT would be a highly centralized system.
A "highly centralized" system where anyone can get a transaction confirmed by paying the appropriate fee? A fee that would be about $20 (1) for a typical transaction even if $10 million a day, or $3.65 billion a year, goes to miners keeping the network secure for everyone?
I'd be very happy to be able to wire money anywhere in the world, completely free from central control, for only $20. Equally I'll happily accept more centralized methods to transfer money when I'm just buying a chocolate bar.
1) $10,000,000/144blocks = $69,440/block
/ 1MiB/block = $69.44/KiB
A two-in, two-out transaction with compressed keys is about 300 bytes, thus $20.35 per transaction.
So, as I've said before: we're running up against the artificial 250K block size limit now, I would like to see what happens. There are lots of moving pieces here, so I don't think ANYBODY really knows what will happen (maybe miners will collectively decide to keep the block size low, so they get more fees. Maybe they will max it out to force out miners on slow networks. Maybe they will keep it small so their blocks relay through slow connections faster (maybe there will be a significant fraction of mining power listening for new blocks behind tor, but blasting out new blocks not via tor)).
That sounds like a whole lot of "maybe" I agree that we need to move cautiously, but fundamentally I've shown why a purely profit driven miner has an incentive to create blocks large enough to push other miners out of the game and gmaxwell has made the point that a purely profit driven miner has no incentive not to add an additional transaction to a block if the transaction fee is greater than the cost in terms of decreased block propagation leading to orphans. The two problems are complementary in that decreased block propagation actually increases revenues up to a point, and the effect is most significant for the largest miners. Unless someone can come up with a clear reason why gmaxwell and myself are both wrong, I think we've shown pretty clearly that floating blocksize limits will lead to centralization.
Variance already has caused the number of pools out there to be fairly limited; we really don't want more incentives for pools to get larger.
I think we should put users first. What do users want? They want low transaction fees and fast confirmations. Lets design for that case, because THE USERS are who ultimately give Bitcoin value.
They want something impossible from an O(n) system without making it centralized. We've already got lots of centralized systems - creating another one doesn't do the world any good. We've only got one major decentralized payment system, Bitcoin, and I want to keep it that way. Users can always use centralized systems for low-value transactions, and if block sizes are limited they'll even be able to very effectively audit the on-chain transactions produced by those centralized systems. Large blocks does not let you do that.
Ultimately, the problem is the huge amount of expensive infrastructure built around the assumption that transactions are nearly free. Businesses make decisions based on what will happen at most 3-5 years in the future, so naturally the likes of Mt. Gox, BitInstance, Satoshidice and others have every reason to want the block size limit to be lifted. It'll save them money now, even if it will lead to a centralized Bitcoin five or ten years down the road.