can blocks remain capped to 1MB forever? 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, eg:


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 (eg 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?
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 &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. 

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/