Let's drop the analogies then and go straight at the problem.
The maximum block size is big, having room for all or most transactions.
Therefore, transaction fees are (close to) zero.
Therefore, total block transaction fees are also (close to) zero.
Therefore, all for-profit block generation ceases.
Therefore, difficulty drops.
If for-profit block generation was the only generation going on then difficulty would be very low and double spending very easy. The only thing that can save the system is people generating at a loss.
Now we have a lot of bitcoin holders that would lose greatly if payments become unreliable and confidence in the system drops. Will they contribute to their common good? If they do it will not be out of self interest. If you contribute to the system reliability you lose your contribution and benefit very little because the benefit is shared with everyone. If you use the system without contributing you benefit from everyone elses contributions anyway.
The usual sad result is that everyone tries to live off of everyone elses contributions, very little is actually contributed and everyone loses.
Classic tragedy of the commons.
I agree with db on this. The issue can be put simply like this: the generator which accepts the lowest fees, makes the most profit. given any two generators with the same capacity.
I don't quite understand da2ce7's post, but he seems to be implying that it's profitable "in the long run" to accept higher fees only. This seems flawed, because in the short run, such a generator will be the first to go out of business.
I want to start thinking about solutions.
One avenue might be to impose some sort of protocol restriction on the fee distribution of transactions in a block. In such a way that generators can't just include every little transaction in a block or else the network will reject it. For example, for a block to be valid, no more than half of the transactions in the block can have fees below the average fee for that block. So, if 10 transactions have a fee of 1BTC and 10 more have a fee of 0.5BTC the average is 0.75. Now half the fees are already below this so an additional transaction with a 0.5BTC fee cannot be accepted, but a 0.8BTC fee is okay. That's just an example, I'm not sure if it would actually work.