I don't see that you've shown something I missed (not trying to be sarcastic). It sounds like you're describing my point.
Ah, you're saying that because miners have a time limit, they won't want to fill up their blocks.
What I'm saying, and now I think you do understand, is that mining is a random process so miners should send every block out with whatever transactions they included in it when they found the correct PoW; we're in agreement on that point.
However, without a limit, what reason do I have to send the miner a high fee in the first place? Provided marginal cost of including my transaction, based on network costs and the increased chance the block will be orphaned, is less than the fee I attached they'll include it. So naturally fees will settle down to that marginal cost. The problem is the network cost is tiny, yet has nothing to do with the long-term cost of storing the UTXO set, and also is fixed so that profitability for larger, more centralized, pools is always higher than smaller pools. The other side of the cost, the orphaning chance, goes down as fees go down, essentially because if fees aren't significant, the loss due to orphaning isn't significant either, so you can take more risks and try to stuff more low-fee transactions into your blocks.
It's a nasty race to the bottom - a textbook example of how capital intensive businesses where efficiency goes up as capital investment tends to result in oligopolies or monopolies in the long run.
OK, got it, thanks. Yes, I was missing something. That's what I get for reading too quickly. The following, which I quoted earlier, is actually right:
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The argument is that unless there is a hard block size limit, miners are incentivised to include any transaction no matter how small its fee because the cost of doing so is practically zero (less than a microdollar, according to Gavins calculations). Therefore if a bunch of transactions stack up in the memory pool that pay a smaller percentage than "normal", some miner will include them anyway because it costs nothing to do so and maximizes short term profit. Hence, you get a race to the bottom and you need some kind of hard network rule saying you can't do that. We already have one in the form of block byte size, so the debate becomes "let's keep the size limit" vs "let's remove it".
In my mind I was thinking of this text from the OP:
One question that comes up often in the block size debate is how will mining be funded if there's no competition for block space.
I took that as meaning no fees, but the other quote is about low/marginal fees, not zero fees.
My response about blocks being limited by time addresses zero fees, not low fees, as miners will prioritize transactions with any fee (even if very low) first.
I see what you mean about the race to the bottom now for marginal fees. I remember reading that point in another debate thread.