What happened in 1980? Or, the socio-economic impact of the shifting nature of optionality.

There has been much that has been published about why we are where we are today.

Whether it's the rise of the Freedom Caucus and Donald Trump in the US, or BREXIT, or the rise of right-wing parties and "strong-man" driven politics around the world, many blame it on the underlying trend of increased income inequality, including the widely cited study by Saez and Piketty, with the dateline usually tracking back to the early 1980s.

What happened during this period?

There are many vectors, including automation and globalization, which have put large groups of traditionally secure workers at risk, or rendered them suddenly redundant. And these disaffected voters blamed machines or blamed globalization.

But there's another underlying trend that's equally to be blamed: and, of course, identifying the problem is the first step towards identifying the solution.

It is the changing nature of how firms look at the optionality within their corporate strategies today.

Earlier this evening, I came across this fantastic BCG strategic history tool featuring landmark strategic ideas over the past decades, and two key papers bookending the '80s caught my attention. And that's what instigated this note.

The first was on Diversification in '82. And the second was on Core Competencies in '89.

Firms had been, through the '60s and '70s struggling to find ways to generate more economic value, and to better manage the risk to their portfolios. This led to highly diversified ones by the late '70s and early '80s.

And this in turn made them highly inefficient, and therefore susceptible to a new breed of investment firms - Private Equity firms like KKR that specialized in leveraged buyouts, with the objective of streamlining inefficient firms and recapturing value by re-focusing enterprises.

This made individual markets competitive, but was also the first major shift in wealth transfers: the money made from the sales of inefficient units was concentrated in the hands of new owners rather than a larger pool of shareholders. Private Equity firms, after all, have a much more concentrated pool of (already wealthy) investors. This explains the massive shift in concentration of wealth versus indexed firms.

If you want to understand just how concentrated this is, consider that eight out of the top 10 largest employers in the US today are owned by PE Funds.

Getting back to the hypothesis, the introduction of the LBO model made firms change their strategic models and refocus on their core businesses -- enter the core competencies model.

But the corporate strategy approach from the '60s and '70s, of functioning as risk portfolio managers, rather than discipline experts, remained.

So we went from, at the cusp of the '70s and '80s, firms that managed risk by spending their cash on diversification, to firms that instead hoarded the cash, with the strategic objective of it being to reinvest in R&D, or buy access to technology, expertise, or markets through M&A, or merely a way of seeking tax "efficiencies".

In both scenarios, whether private equity concentration or corporate risk management, the money, however, never went back to shareholders.

The principle driving both approaches is the maximization of optionality.

When you are looking to maximize optionality against complete unknowns, it becomes impossible to know how much is enough. In such scenarios, your risk appetite is always going to be limited.

But if the money doesn't flow, the market won't shift.

Which brings us to where we are today.

Why the economy seems stagnant.

And why politics are shifting the way they are today.

How do we turn the tide?

Governments and regulators need to coax the concentrated wealth back into the market: but doing so with taxation will always be difficult as, given how global the cash is today, there will always be players who don't follow suit, instead creating tax havens and invariably leading to even more hoarding.

What is needed are the creation of new investment opportunities and asset classes -- whether from the supply-side or the demand-side -- that makes it flow again.

And this takes imagination, not just tax rates or interest rates.

The market is again highly inefficient today, as it was when the private equity firms came in with the LBO model. It is primed for disruption.

I wonder what the next strategic disruption will be.

It must be around the corner.

It could be the creation of purely new "equity" with tech like Bitcoin, or via the Blockchain-ification of industries.

It could be led by technologies like 5G or Cognitive that open up new opportunities.

Or it could be led by regulatory shifts.

What do you think?