Dear Cecil:
I know that body hair only grows to a certain length and then stops. But how does hair know it's been cut? For instance, if I cut some arm or leg hair off, how does it know this, and grow back? Do you understand?
— Mary B., Dallas

Dear Mary,
I am giving it my all, madam. Hair doesn't know it's been cut, and being dead tissue, doesn't much care. The fact is that body hair will grow if you cut it, and it will grow if you don't cut it--it is, in short, always growing (or at least, at any given time, a substantial portion of it is.) You just don't realize it, since in aggregate it never seems to get any longer. That's because the longest hairs fall out, having been pushed out of their sockets by newer hairs working up from below.

The difference between body hair and scalp hair (and, in males, chin and mustache hair) is that the latter for practical purposes grows continuously, whereas the former alternates regular periods of growth and dormancy. During the growth portion of the cycle, body hair follicles are long and bulbous, and the hair advances outward at about a third of a millimeter per day.
After a few weeks growth stops, at which point, needless to say, the hair is as long as it is going to get. The follicle shrinks and the root of the hair rigidifies. Following a period of dormancy, another growth cycle starts, and eventually a new hair pushes the old one out of the follicle from beneath.

Naturally, the process doesn't occur simultaneously all over the body or you'd be shedding like a cocker spaniel. Whenever you happen to shave your legs you'll be mowing some long, nongrowing hairs as well as some shorter, still-growing ones. And you'll miss some tiny new hairs, which haven't yet protruded above the skin surface. The stubble you feel a day or two later is evidence that growth continues unimpeded.

OK, you say, but why does head hair grow to great length whereas body hair doesn't? Nobody knows exactly, but some anthropologists believe the purpose of long head hair is to give you something to tie ribbons in. No kidding. Quoth one, "the functional significance of long head hair is almost certainly adornment, providing for the 'sexual selection' that Darwin correctly argued was a potent factor in the evolutionary process." In other words, when you drop sixty bucks at the beauty parlor, don't feel guilty--you're helping to advance the species. - Cecil Adams

From: “The Straight Dope” by Cecil Adams