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Why is your proposal a bad thing?
Because the theory is that there is no equilibrium, the transaction fees will increase to far beyond what is reasonable, i.e. imagine 10% transaction fees.
I am still trying to catch up on sleep. Once my full mental facilities return, I will try to explore the theory more mathematically if I can.
I don't think that is possible. If some people refuse to mine transactions under 10%, there will be others who include those transactions to get the fees. Having a low fee might make your transaction slower, but as long as you include some fee the transaction will eventually get picked up by somebody. Bitcoins is still open source, you will never have 100% of the miners agree completely.
Already you run into people who say "we miners are getting abused, let's all refuse to include no-fee transactions", and they can modify their software to only include fee-carrying transactions, but there will be other people who just laugh at them and keep putting the free transactions in.
Do you really think that transaction fees will increase forever? Why would the bitcoin way of sending money not be subject to competition just like other things in a free market? Why would I pay a huge premium to send bitcoin if I can send funds via wire, credit card, or bank for around 3.5%? Pretty sure the miners will need to be competitive to alternatives way of transferring money.
I know you are a big proponent of free markets (as I am too), so I am interested on why normal supply/demand theory does not work in this instance? I feel that miners will have to competitively price fees to acceptable alternatives. I think if they raise them too high, they drive away business. I think they will price their product at the point which supply/demand will allow the maximum amount of fees to be generated.
