The CAGED system was not 'invented'. It is a fact. It is how the guitar works and comes directly from the tuning of the instrument combined with western harmony.
I've been meaning to add this lesson for some time, so after harassment from certain members of the forum (trish, liev and co...:)), and seeing the question asked a few times I have decided to use some time off this afternoon to get it done :) hope it makes sense to you...
You should find that after understanding this system that a lot of things make more sense and I will try and point out the most important things as we go and link to relevant lessons.