Theory and explanation in economics and in financial geography

Wójcik and Bratton's (2026) review of ‘theory and explanation’ in the financial geography literature draws two central conclusions. First, financialization has ‘the status of [this literature's] leading theory’; and ‘economics, particularly the financial variety, has been gradually pushed away from financial geographies in a shift that accompanied the decline of quantitative research approaches’. But ‘financialization’, while it has provided a shared intellectual ground for the development of this subdiscipline, is a ‘theory’ only insofar as it denotes a domain of exploration. Second, ‘should we then pay more attention to economics and explanatory theories and models of the kind economists use?’, despite ‘the hubris and complacency of economists’, which ‘did the most damage to society in living memory’. Their answer is that the models and methods of economics can supply needed conceptual building blocks for developing explanations in this emerging field of inquiry, since ‘there is much less difference between theory and explanation … [in] what economics partly is … than most geographers think’.

Their argument unfolds in two steps. They first affirm Henry Yeung's recent endorsement of ‘mid-range theories deploying causal mechanisms’ (2023: 174). Yeung argues that ‘mid-range theories’ will permit geographers to ‘consider the operation of these mechanisms in different socio-spatial contexts and therefore the contingency and situatedness of our knowledge production’ (2023: 174). Wójcik and Bratton agree: ‘Like Yeung, we believe in the value of mid-range explanatory theories as a way to address complex and unpredictable social reality’.

The authors then set out four reasons for bringing financial geography and economics closer together: (1) there are varieties of economics; (2) ‘the nature of economics as such’ should be differentiated from the excessive confidence in ‘market efficiency and self-regulation’ that blinded many economists to the subprime meltdown; (3) economics is changing due to this ‘shock’, as shown by changing IMF guidelines; (4) ‘economists, whether we like it or not, have the ear of policymakers and strategists, particularly in finance’. ¹ Before considering what this closer relationship can entail, we must unpack the unresolved tension in the authors’ acknowledgement that there are ‘varieties’ of economics and their endorsement of ‘economics as such’. This will permit us to explore what ‘causal mechanisms’ are contained in economics’ toolkit, and whether they qualify as ‘causal mechanisms’ in the ‘mid-range’ theories that Yeung advocates.

Yeung argues that mid-range theory is needed because ‘[g]eography is characterized by a multitude of (critical) approaches and concepts, but perhaps too few substantive theories explaining diverse geographical phenomena’ (2023: 1). That said, Yeung does not suggest that economic theory has what geography is missing. To the contrary, Yeung wants to revitalize critical human geography, a task for which he sees geography as well suited, in part because geography has no ‘ghettoized subfield, hiring practices, and journals known as “Geographical Theory”’ (2023: 3). Economics, however, has such subfields, practices, and journals.

Wójcik and Bratton propose that because economics’ theoretical toolkit explains the mechanisms that guide practices in markets, it can provide the ‘mid-range theories’ that financial geography needs. They cite, as a prominent financial example, the work of economists Douglas Diamond and Philip Dybvig, who were awarded the 2022 Nobel Prize ‘for research on banks and financial crises’ (Nobel Prize, 2022). These economists’ microfoundational models demonstrate how sorting or monitoring mechanisms in credit markets can avoid suboptimal equilibria (including bank runs) that would otherwise arise due to moral hazard (Diamond, 1984) or incomplete information (Diamond and Dybvig, 1983). But while the Nobel Prize given to these two authors demonstrates the significance of their models within the profession, any analogy between these models and Yeung's ‘mid-range theories’ is misplaced. A ‘mid-range’ model of the type Yeung is seeking would explain how bank lending really works. The Diamond/Dybvig models explain how banks should work in theory. The distinction is crucial, for it goes to the heart of Yeung's – and the authors’ – call for paying attention to how spatialized processes in the real world really work.

Neoclassical economics

Why the difference? Diamond and Dybvig's models resonated with fellow members because their explanation of banking conforms with the explanatory norms of one of economics’ theoretical cores – neoclassical economics. Economists working within the neoclassical theoretical core build models based on methodological individualism, methodological instrumentalism, and methodological equilibration (Arnsperger and Varoufakis, 2006). Their theoretical reference point is the Walrasian general equilibrium (WGE) – an abstract mathematical representation of a perfectly coordinated, costlessly achieved, full-information market equilibrium.

The ‘agents’ populating a WGE need know only their own preferences and the price vector to achieve a first-best (Pareto optimal) outcome, wherein no agent can be made better off without making one or more other agents worse off. In WGE, economic agents have no need of economic mechanisms; indeed, neither money nor finance has any role to play. Only when the assumptions of WGE are violated – for example, if transactions are costly or if information is asymmetric (as in the case of moral hazard) – will optimizing agents have any need of mechanisms other than market exchanges. When WGE assumptions are violated, economists propose ad hoc explanations of how rational agents might adjust to the postulated deviations from WGE by inventing these mechanisms. In Diamond and Dybvig (1983), banks emerge to collect agents’ savings and invest them optimally based on the population shares of longer-lived and shorter-lived agents, thus guaranteeing both socially maximal returns and liquidity for those who need it (‘early diers’). In Diamond (1984), borrowers may choose risky investments unless they are monitored; but because there are economies of scale in monitoring, banks emerge as a socially optimal ‘fix’.

These microfoundational explanations are not made to describe real-world lending or banking; they are designed to explain how optimizing agents might solve a particular equilibration problem. Lenders in Diamond and Dybvig's models, for example, improve outcomes for their depositors and borrowers; a subprime crisis wherein lenders exploit borrowers who are racialized minorities (as described in Dymski (2009)) is ruled out by assumption. The shared commitment to WGE as a conceptual core binds neoclassical economists together, and provides an Occam's Razor rule for model design: that explanation is best that makes the fewest possible deviations from the assumptions required for WGE.

This leads to a baseline presumption that real-world markets function best when they are least impeded by government regulation, control, or cost pressures. This is far from the ‘mid-range theories’ advocated by Yeung. Indeed, whereas one proposed use of ‘mid-range’ theories in geography is to ‘address complex and unpredictable social reality’, as Wójcik and Bratton put it, neoclassical models strip away all unneeded analytical features. To explain is to build a model conforming to this norm. The ‘socio-spatial contexts’ of market exchanges are outside neoclassical economics’ theoretical boundaries.

Heterodox economics

Heterodox economists, by contrast, insist on the fundamental explanatory importance of theoretical features absent from WGE. These features typically operate at the social, not individual, level: for Marxian economists, class conflict; Keynesian economists, the role of uncertainty and aggregate demand; stratification economists, the power differentials that arise when agents are gendered or racialized; ecological economists, the problem of non-renewable resources and planetary boundaries; and so on. While economic heterodoxy has no single centre of gravity (Dymski, 2014), its proponents share the view that market forces left to their own devices will go wrong because one or more key features of social structure are being ignored. In common with neoclassical economists, heterodox economists insist on embedding whatever social feature their theoretical core privileges in any problem they examine. Where a Marxian might see class conflict, a Keynesian might see aggregate demand shortfalls (and so on).

Economic theories are driven by the pre-analytical visions (Schumpeter, 1954) and methodological conventions of the different clusters of economists who create them. In economics, theory is explanation: one's theoretical foundations already contain the key behavioural or institutional elements that will drive an explanation of whatever phenomenon is being examined. So theory provides not an open terrain for investigation, but that investigation's answer key. The multiple theoretical cores within economics hardwire theoretical conflict among its practitioners into the heart of this discipline.

The historical context

Regarding the evolution of economic theory, Wójcik and Bratton correctly observe that the influence of neoclassical economics in the 1980s and 1990s was due to ‘historical contingency’. The WGE provides a conceptual base from which to generate economic models supporting neoliberal attacks on Keynesian welfare states (to pick one example). The historical context matters profoundly here: the rise of economics’ microfoundational 1980s revolution was preceded by the multiple economic traumas of the 1970s, which undercut the post-war hegemony of Keynesian macroeconomic models. Whereas the possibility of aggregate demand shortfalls was a structural feature of those models, demand shortfalls were a theoretical non-possibility in the WGE-based frameworks that challenged and then superseded them. Those models, focused almost entirely on representative agents’ choices, have little or no conceptual space for the collective-action failures that Keynesian policies are designed to counter.

Contrary to the hope expressed by Wójcik and Bratton, those parts of the economic firmament that anchor neoliberal policies are holding firm, even now. While the IMF briefly stepped away from its neoliberal policy commitments after the 2008 global financial crisis, rising global sovereign debt levels have recommitted it to orthodoxy (Gourinchas and Mumssen, 2026); and the former IMF economist who opened the door to its non-neoliberal policy path subsequently reaffirmed the centrality of general equilibrium as the sine-qua-non of macroeconomic modelling (Blanchard, 2016).

Conclusion

Financial geography's closer engagement with economics is more necessary now than ever. But economics provides no shared theoretical core, nor any ready-made set of ‘mid-range’ models explaining how things work in real financial worlds. Theory and explanation are intertwined by the rules of the theoretical game(s) to which economists are pre-committed. And since economists disagree profoundly both about their core theoretical foundations and about methodology, their discipline is characterized by unresolvable and sometimes uncivil ongoing debates. Geographers must be prepared to use economists’ models and methods strategically, with full awareness of the theoretical premises built into the construction of these devices. Furthermore, in engaging with economists, they will be exposed to the elbows-out interactions to which economics’ multi-polarity can lead.

Wójcik and Bratton warn against a financial geography that is too narrow in focus, instead advocating for the propagation of mid-range theories that can decode ‘complex and unpredictable social reality’. The problem of narrowing theory, however, is far deeper in economics. Too many economists routinely remove any traces of ‘complex and unpredictable social reality’ from their microfoundational frameworks. Economists’ overreliance on theory-mandated simplifications already led to their failure to foresee one 21st-century catastrophe; in a post-2008 world increasingly gripped by polycrises, other failures are sure to follow.

In this context, financial geographers have much to contribute as non-economists. Beyond the work they might do on the spatial production of finance or the financial production of space – areas in which financial geographers lead the way – there are broader policy and theoretical concerns for which the spatiality of finance is centrally important. The availability or absence of finance – its functionings, malfunctionings, and breakdowns – in local, regional, national, and global spaces is a crucial determinant of prosperity, economic growth, and sustainability. Armed with a commitment to ‘mid-range theories’ that describe how real-world mechanisms and systems work, geographers can clarify policy options.

There is no need to restrict attention to topics for which large datasets are available, since only portions of the data describing where finance goes and how it works are systematically accessible; and even small-scale case studies using mixed methods can open the doors of insight. Two examples – explorations of financial exclusion by Leyshon and Thrift (1995), and of the Northern Rock crisis by Marshall et al. (2011) – demonstrate the policy impact that geographical research on financial issues that economists have overlooked or been unable to properly frame can have. Economists need geographers’ ability to see events complexly unfolding at multiple spatial scales as much as, or more than, geographers need access to economists’ econometric modelling codes. Financial geographers, in drawing closer, can help economists strip away the ‘hubris and complacency’ that have left them isolated within the social sciences for far too long.