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A formal systems-level treatment of regulatory substitution. Scale-independent, substitute-agnostic, and structurally deterministic.
When decision demand rate exceeds regulatory capacity rate beyond a critical threshold, substitution is not a contingent outcome of poor governance—it is a structural inevitability. The model is agnostic about what substitutes, who substitutes, and in what domain.
A visual introduction to Regulatory Substitution as Rate-Limited Systems Failure
The ACC paper described the phenomenon in institutional terms. RSRLS asks: what is the underlying systems logic?
The formal question:
"Under what structural conditions is regulatory substitution not merely possible but inevitable, regardless of the quality, intent, or identity of actors involved?"
This paper provides an answer that is:
The key move is treating regulatory capacity as a rate-limited resource—one with a finite throughput limit.
When demand rate consistently exceeds capacity rate, the gap cannot be closed by "trying harder"—it must be addressed by substitution.
The maximum rate at which the system can produce legitimate regulatory judgments. Bounded by cognitive, procedural, and material constraints.
The rate at which decisions requiring regulatory judgment are demanded. Can spike during crises, policy changes, or structural shifts.
When decision demand rate exceeds maximum capacity rate beyond a critical threshold, substitution is structurally inevitable—not a policy choice or governance failure.
The Substitution Invariant is invariant in three senses:
Applies across institutions, firms, agencies—any system with rate-limited regulatory capacity
Examples: Central banks, universities, hospitals, courts, professional bodies
Applies regardless of individual competence, values, or intentions of participants
Examples: Good judges, ethical regulators, skilled administrators—all subject to the same dynamics
Applies regardless of what the substitute is—rules, metrics, algorithms, markets
Examples: Whether substitution is legal, algorithmic, or market-based, the structural logic is identical
This is not a claim that substitution is inevitable in all circumstances. It is a claim that substitution is inevitable when the rate condition is satisfied. The question shifts from "will substitution occur?" to "is the rate condition satisfied?"
Capacity at time t₂ is less than capacity at time t₀, even when pressure has returned to baseline. The system does not return to its original state.
Authority Hysteresis means capacity loss is path-dependent. The system's trajectory matters—not just its current conditions. This creates recovery asymmetry: losing capacity is faster than rebuilding it.
Improving the quality of substitutes accelerates capacity collapse. Better rules, smarter metrics, more sophisticated algorithms—all worsen authority decay.
The Optimisation Paradox emerges because better substitutes suppress regenerative feedback.
As substitute quality rises (purple), authority capacity falls (red). Visible errors decline (amber dashed), masking the collapse until recovery becomes impossible.
Implication: Regulatory reform that improves substitute quality without addressing rate dynamics may accelerate the very collapse it aims to prevent. The reform succeeds on its own terms while worsening the structural problem.
Insulation functions as rate-control, not outcome-governance. It modulates how fast demand reaches capacity, not what decisions are made.
This is a critical distinction. Insulation is not aboutprotecting certain decisions or guaranteeing certain outcomes. It is about maintaining the rate conditions under which judgment can operate.
Structural separation between external event timing and internal decision timing
Process requirements that cannot be bypassed under pressure
Funding not contingent on external evaluation cycles
Insulation mechanisms have a kinetic function (modulating rate dynamics) rather than a normative function (determining what decisions should be made). This distinction is essential: insulation protects the capacity to judge, not particular judgments.
The model applies where its assumptions hold. Understanding boundaries prevents misapplication.
Applies when
System has finite throughput for judgment
Does not apply when
System can scale capacity with demand
Applies when
Regulatory constraints require active maintenance
Does not apply when
Constraints are self-enforcing or static
Applies when
Decisions require contextual evaluation
Does not apply when
Selection systems with determinable outcomes
The framework explicitly excludes "selection systems"—systems whose function is to identify pre-existing correct answers rather than produce contextual judgments. Selection systems can be optimised without authority capacity loss.
When decision demand rate exceeds regulatory capacity rate beyond a critical threshold, substitution is not contingent—it is structurally inevitable regardless of quality, intent, or governance.
Systems fail to recover capacity even after pressure subsides. The loss is path-dependent—recovery requires more than removing the cause.
Improving the quality of substitutes accelerates capacity collapse by suppressing regenerative feedback. Better rules worsen authority decay.
Insulation functions to control the rate at which demand reaches capacity, not to govern what decisions are made. It's kinetic, not normative.
The formal framework suggests interventions should focus on rate management, not substitute improvement. The question is not "how do we make better rules?" but "how do we maintain rate conditions where judgment can operate?"
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