It’s a fair question for someone not into aviation before the era of the stretched 737-900s and 737 9 and 10 maxes of today. I’d imagine at some point it would’ve been a business decision to keep the 737 stubbier so it didn’t start to compete with the 757 when that was still in production. They certainly would’ve had the engineering and tech (and probably the idea) to stretch the 737 to the -900 variant in the 90s, but it’s only 20 feet shorter than the 757-200, burns a good 2 to 2.5 tons less fuel per hour than the 57 with RRs - and has only 19 less seats. Would’ve been a relative no brainer for airlines to buy a stretched 37 for a wide range of uses on all but the routes that need the 757’s slightly longer range - but 2-2 transoceanic flights fell out of style rather quickly in favour of the 3-3-3s.