1MB-block supporters have 2 major arguments: decentralization and block space scarcity. By considering ONLY these 2 factors, however, the BEST solution is to limit a block to only 2 transactions: a reward transaction and a normal transaction. This will limit the block size to absolute minimal, and make sure everyone could mine with a 9.6k modem and a 80386 computer

The truth is that the 1MB limit was just an arbitrary choice by Satoshi without any considering its implications carefully (at least not well documented). He chose "1" simply because it's the first natural number. Had he chosen 2MB instead of 1MB, I am pretty sure that Bitcoin would have worked in exactly the same way as how it works now. Had he chosen 0.5MB, we might have already run into a big trouble.

We want to maximize miner profit because that will translate to security. However, a block size limit does not directly translate to maximized miner profit. Consider the most extreme "2 transactions block limit", that will crush the value of Bitcoin to zero and no one will mine for it. We need to find a reasonable balance but 1MB is definitely not a good one. Assume that we aim at paying $1 million/block ($52 billion/year) to secure the network (I consider this as a small amount if Bitcoin ever grows to a trillion market cap). The current 7tps llimit will require a fee of $238/tx, which is way too expensive even for a global settlement network among banks.

To answer the question of "what to replace the 1 MB block size limit with", we first need to set a realistic goal for Bitcoin. In long term, I don't think bitcoin could/should be used for buying a cup of coffee. To be competitive with VISA, the wiki quotes 2000tps, or 1200000tx/block, or 586MB/block (assuming 512bytes/tx). To be competitive with SWIFT, which has about 20 million translations per day, it takes 232tps, or 138889tx/block, or 68MB/block. Divide them by the $1 million fee/block, that would be $0.83/tx and $7.2/tx respectively. A fix rate of $7.2/tx is a bit high but still (very) competitive with wire transfer. $0.83/tx is very competitive for transactions over $100 of value. I think a reasonable choice, with the implications for centralization considered, would be around 100MB/block. That takes 1.5Mb/s of bandwidth in a perfect scenario. That would be a better equilibrium in technical and economical terms.