However, with no limit on block size, it effectively becomes miners who are in control of _everyone_'s block size. As a non-miner, this is not something I want them to decide for me. Perhaps the tragedy of the commons can be avoided, and long-term rational thinking will kick in, and miners can be trusted with choosing an appropriate block size. But maybe not, and if just one miner starts creating gigabyte blocks, while all the rest agrees on 10 MiB blocks, ugly block-shunning rules will be necessary to avoid such blocks from filling everyone's hard drive (yes, larger block's slower relay will make them unlikely to be accepted, but it just requires one lucky fool to succeed...).
Well, read my initial post at the top; that larger blocks don't propegate to the network as a whole is actually benefits the miner because provided the blocks propagate to more than 50% of the effective hashing power, the part that doesn't get the block is effectively wasting their mining effort and taken out of the competition.
Additionally even if miners see a rational reason to keep block-sizes low, which I already doubt, allowing them to control the size gives irrational miners who are trying to actively damage Bitcoin another way to do so. Right now all that an evil miners can do is either help double-spend attempts, easily defeated with confirmations, or launch a 51% attack, so far defeated with large amounts of hashing power. We don't want to give yet more ways for malicious people to damage Bitcoin, especially ones which are actually profitable in the short term.
My suggestion would be a one-time increase to perhaps 10 MiB or 100 MiB blocks (to be debated), and after that an at-most slow exponential further growth. This would mean no for-eternity limited size, but also no way for miners to push up block sizes to the point where they are in sole control of the network. I realize that some people will consider this an arbitrary and unnecessary limit, but others will probably consider it dangerous already. In any case, it's a compromise and I believe one will be necessary.
I mean, I'm not totally against a one-time increase if we really need it. But what I don't want to see is an increase used as a way to avoid the harder issue of creating alternatives to on-chain transactions. For one thing, Bitcoin will never make for a good micropayments system, yet people want Bitcoin to be one. We're much better off if people work on off-chain payment systems that complement Bitcoin, and there are plenty of ways, like remote attestation capable trusted hardware and fidelity bonds, that allow such systems to be made without requiring trust in central authorities.
I would hate to see the limit raised before the most inefficient uses of blockchain space, like satoshidice and coinad, change the way they operate. In addition I would hate to see alternatives to raising the limit fail to be developed because everyone assumes the limit will be raised. I also get the sense that Gavin's mind is already made up and the question to him isn't if the limit will be raised, but when and how. That may or may not be actually true, but as long as he gives that impression, and the Bitcoin Foundation keeps promoting the idea that Bitcoin transactions are always going to be almost free, raising the block limit is inevitable.
Anyway, there are plenty of good reasons to have off-chain transactions regardless of what the block limit is. In particular they can confirm instantly, so no waiting 6 blocks, and they can use chaum tokens to truely guarantee that your transactions are private and your personal financial information stays personal.