user2116: This is perhaps more of an economics question than a bitcoin question, but I'm wondering if it would be viable to leave the block size capped at 1MB for all time and simply let a series of rules govern which transactions get included into a mined block, e.g.:

paying a higher fee gives higher priority
older coins get higher priority
bigger spend gets higher priority
etc

This would incentivize people to rely more on off-chain transactions (e.g. gyft cards), or sidechains, to accumulate many payments into a single transaction, and perhaps to delay transactions if they do not wish to pay high fees. And one benefit would be that the blockchain would not grow beyond a size which would fit on a single user's hard disk. This would keep bitcoin decentralized without any need for a hardfork.
Are there any fatal flaws to this notion?

user10377: It's worth the time to read the December 2013 three page "Chicago Fed Letter" titled "Bitcoin: A primer" description that the Federal Reserve has about Bitcoin, see http://www.chicagofed.org/digital_assets/publications/chicago_fed_letter/2013/cfldecember2013_317.pdf.  There is truth in the assertion that "There are on average about 30 bitcoin transactions per minute (Visa transactions average 200,000 per minute). The average bitcoin transaction size is about 16, i.e., on the order of $2,000 (the average Visa transaction is about $80)". See https://blockchain.info/charts/n-transactions-per-block for the truth about Bitcoin transaction rates. This is at the heart why the Bitcoin block size is so contentious. For existential reasons, extreme care has to be exercised by the Bitcoin Community for picking a course of action. Strategies need to be established to not grow too quickly, and establishing symbiotic crypto currency allies to load balance the anticipated demand for crypto currency transactions while an optimal an optimal decentralized architecture is identified enabling Bitcoin to scale by at least three orders of magnitude while sustaining it decentralized characteristics. Making block sizes too large will leave mining operations in the hands of only a few, which puts us back into the same centralized banking paradigm. This is the big challenge! Some big decisions need to be made. Bitcoin Technology is in its propeller-driven bi-plane era, getting it into the space/jet-age will take considerable work and cooperation. 

user2116: According to Andreas Antonopolis:

Blockchains are never going to scale in the base layer, but Bitcoin can [scale] and its going to be a combination of both second and third layer scaling, as well as base layer scaling. We'll increase the block size again - already did - we'll do it again, if necessary - not to support bare transactions, but to support more second layer scale on the base layer, when necessary.

I think by "second layer technology" Andreas would include:

lightning networks
sidechains
other kinds of off-chain transactions
etc

And it should be noted that he has said before that he would not advocate any current implementation of bitcoin technologies at risk of getting burnt again.

user5757: 
simply let a series of rules govern which transactions get included into a mined block

The Bitcoin protocol has no way to enforce such rules.  Miners have complete discretion as to which transactions they include in  a block.  Your first suggestion (higher fee gives higher priority) will happen naturally if miners are greedy, but there's no way to make them select blocks on any other basis, nor any clear way to incentivize them to include older or larger transactions.
If such rules were to be mandatory, at minimum there would have to be a hard fork to adopt them into the protocol, and even then it's not at all clear what the new protocol would look like.   Suppose a miner omits a "high-priority" transaction in favor of one to which your rules give lower priority.  If the rule is mandatory, then his block should therefore be invalid. 
But remember that it has to be possible to validate the blockchain after the fact. If someone is downloading and verifying the blockchain months later, how will they have any way of knowing that this high-priority transaction was in the mempool at the time and therefore this block is not acceptable?  This seems unworkable.
Bitcoin Core used to follow priority rules by default, with some block space reserved for transactions with high "bitcoin days destroyed" (older and larger), but this was strictly voluntary, and any miner could patch the code or use different software if they wanted to do something different.  Their blocks would be accepted just the same either way.  And in fact, as soon as transaction volume reached the point where it was more lucrative to include higher-fee transactions over those with higher BDD, miners began to do so in short order, and eventually Bitcoin Core gave up and removed its BDD rules in favor of a purely greedy algorithm.

user10377: The blocksize topic correlates directly with the current 7 transaction per second (TPS) ceiling Bitcoin has that was recently brought to light before US Congressional Testimony. https://en.bitcoin.it/wiki/Scalability describes the 7 TPS ceilings under "Current bottlenecks".  Ignore block framing data fields, the 7 TPS limit implies that ~4200 transaction (10*60*7) with each being ~238 bytes in size fitting nicely into the 1MB block brown bag. A careful examination of the top of blockchain-dot-info will indicate the real world is a little more complex, and the 7 TPS ceiling is extremely optimistic, most transactions will be significantly larger than 238 bytes size! My mining Payouts alone are ~4K in size.
The tweaking of the blocksize a very hot/political topic. Remember the March 12, 2013 Bitcoin forked Blockchain issue??? (http://bitcoin.org/en/alert/2013-03-11-chain-fork) It is too early for me to tell what the trade space pros & cons [system's engineering truth concerning the trade space analysis of alternative (AoA) results for backward compatibility, scalability, security, sustained decentralization... measures of effectiveness (MOE) and measures of performance (MOP)] is for increasing the current 1MB block size in the Blockchain. 
Ignoring state politics, in the end, the dynamics between stability of developer solutions, hardware engine solutions, miners and pools will ultimately determine the block size(s) supported in the future.
See:

http://keepbitcoinfree.org/
https://bitcoin.stackexchange.com/tags/blockchain-fork/hot
http://www.reddit.com/r/Bitcoin/comments/1owbpn/is_there_a_consensus_on_the_blocksize_limit_issue/
http://www.reddit.com/r/Bitcoin/comments/ioeob/an_alternative_to_supernodes/


2116: <p>This is perhaps more of an economics question than a bitcoin question, but I'm wondering if it would be viable to leave the block size capped at 1MB for all time and simply let a series of rules govern which transactions get included into a mined block, e.g.:</p>
<ul>
<li>paying a higher fee gives higher priority</li>
<li>older coins get higher priority</li>
<li>bigger spend gets higher priority</li>
<li>etc</li>
</ul>
<p>This would incentivize people to rely more on off-chain transactions (e.g. gyft cards), or sidechains, to accumulate many payments into a single transaction, and perhaps to delay transactions if they do not wish to pay high fees. And one benefit would be that the blockchain would not grow beyond a size which would fit on a single user's hard disk. This would keep bitcoin decentralized without any need for a hardfork.</p>
<p>Are there any fatal flaws to this notion?</p>
 10377: <p>It's worth the time to read the December 2013 three page "Chicago Fed Letter" titled "Bitcoin: A primer" description that the Federal Reserve has about Bitcoin, see <a href="http://www.chicagofed.org/digital_assets/publications/chicago_fed_letter/2013/cfldecember2013_317.pdf" rel="nofollow">http://www.chicagofed.org/digital_assets/publications/chicago_fed_letter/2013/cfldecember2013_317.pdf</a>.  There is truth in the assertion that "There are on average about 30 bitcoin transactions per minute (Visa transactions average 200,000 per minute). The average bitcoin transaction size is about 16, i.e., on the order of $2,000 (the average Visa transaction is about $80)". See <a href="https://blockchain.info/charts/n-transactions-per-block" rel="nofollow">https://blockchain.info/charts/n-transactions-per-block</a> for the truth about Bitcoin transaction rates. This is at the heart why the Bitcoin block size is so contentious. For existential reasons, extreme care has to be exercised by the Bitcoin Community for picking a course of action. Strategies need to be established to not grow too quickly, and establishing symbiotic crypto currency allies to load balance the anticipated demand for crypto currency transactions while an optimal an optimal decentralized architecture is identified enabling Bitcoin to scale by at least three orders of magnitude while sustaining it decentralized characteristics. Making block sizes too large will leave mining operations in the hands of only a few, which puts us back into the same centralized banking paradigm. This is the big challenge! Some big decisions need to be made. Bitcoin Technology is in its propeller-driven bi-plane era, getting it into the space/jet-age will take considerable work and cooperation. </p>
 2116: <p><a href="https://youtu.be/dm9m1oQr6Ks?t=47s" rel="nofollow noreferrer">According to Andreas Antonopolis</a>:</p>

<blockquote>
  <p>Blockchains are never going to scale in the base layer, but Bitcoin can [scale] and its going to be a combination of both second and third layer scaling, as well as base layer scaling. We'll increase the block size again - already did - we'll do it again, if necessary - not to support bare transactions, but to support more second layer scale on the base layer, when necessary.</p>
</blockquote>

<p>I think by "second layer technology" Andreas would include:</p>

<ul>
<li>lightning networks</li>
<li>sidechains</li>
<li>other kinds of off-chain transactions</li>
<li>etc</li>
</ul>

<p>And it should be noted that he has said before that he would not advocate any current implementation of bitcoin technologies at risk of getting burnt again.</p>
 5757: <blockquote>
  <p>simply let a series of rules govern which transactions get included into a mined block</p>
</blockquote>

<p>The Bitcoin protocol has no way to enforce such rules.  Miners have complete discretion as to which transactions they include in  a block.  Your first suggestion (higher fee gives higher priority) will happen naturally if miners are greedy, but there's no way to make them select blocks on any other basis, nor any clear way to incentivize them to include older or larger transactions.</p>

<p>If such rules were to be mandatory, at minimum there would have to be a hard fork to adopt them into the protocol, and even then it's not at all clear what the new protocol would look like.   Suppose a miner omits a "high-priority" transaction in favor of one to which your rules give lower priority.  If the rule is mandatory, then his block should therefore be invalid. </p>

<p>But remember that it has to be possible to validate the blockchain after the fact. If someone is downloading and verifying the blockchain months later, how will they have any way of knowing that this high-priority transaction was in the mempool at the time and therefore this block is not acceptable?  This seems unworkable.</p>

<p>Bitcoin Core used to follow priority rules by default, with some block space reserved for transactions with high "bitcoin days destroyed" (older and larger), but this was strictly voluntary, and any miner could patch the code or use different software if they wanted to do something different.  Their blocks would be accepted just the same either way.  And in fact, as soon as transaction volume reached the point where it was more lucrative to include higher-fee transactions over those with higher BDD, miners began to do so in short order, and eventually Bitcoin Core gave up and removed its BDD rules in favor of a purely greedy algorithm.</p>
 10377: <p>The blocksize topic correlates directly with the current 7 transaction per second (TPS) ceiling Bitcoin has that was recently brought to light before US Congressional Testimony. <a href="https://en.bitcoin.it/wiki/Scalability" rel="nofollow noreferrer">https://en.bitcoin.it/wiki/Scalability</a> describes the 7 TPS ceilings under "Current bottlenecks".  Ignore block framing data fields, the 7 TPS limit implies that ~4200 transaction (10*60*7) with each being ~238 bytes in size fitting nicely into the 1MB block brown bag. A careful examination of the top of blockchain-dot-info will indicate the real world is a little more complex, and the 7 TPS ceiling is extremely optimistic, most transactions will be significantly larger than 238 bytes size! My mining Payouts alone are ~4K in size.</p>

<p>The tweaking of the blocksize a very hot/political topic. Remember the March 12, 2013 Bitcoin forked Blockchain issue??? (<a href="http://bitcoin.org/en/alert/2013-03-11-chain-fork" rel="nofollow noreferrer">http://bitcoin.org/en/alert/2013-03-11-chain-fork</a>) It is too early for me to tell what the trade space pros &amp; cons [system's engineering truth concerning the trade space analysis of alternative (AoA) results for backward compatibility, scalability, security, sustained decentralization... measures of effectiveness (MOE) and measures of performance (MOP)] is for increasing the current 1MB block size in the Blockchain. </p>

<p>Ignoring state politics, in the end, the dynamics between stability of developer solutions, hardware engine solutions, miners and pools will ultimately determine the block size(s) supported in the future.</p>

<p>See:</p>

<ol>
<li><a href="http://keepbitcoinfree.org/" rel="nofollow noreferrer">http://keepbitcoinfree.org/</a></li>
<li><a href="https://bitcoin.stackexchange.com/tags/blockchain-fork/hot">https://bitcoin.stackexchange.com/tags/blockchain-fork/hot</a></li>
<li><a href="http://www.reddit.com/r/Bitcoin/comments/1owbpn/is_there_a_consensus_on_the_blocksize_limit_issue/" rel="nofollow noreferrer">http://www.reddit.com/r/Bitcoin/comments/1owbpn/is_there_a_consensus_on_the_blocksize_limit_issue/</a></li>
<li><a href="http://www.reddit.com/r/Bitcoin/comments/ioeob/an_alternative_to_supernodes/" rel="nofollow noreferrer">http://www.reddit.com/r/Bitcoin/comments/ioeob/an_alternative_to_supernodes/</a></li>
</ol>
