Evidently, WordReference thinks I type too much so I'm forced to split this post in two:
It is all pure conjecture and “educated” guesses.
There is enough evidence available so that our conclusions can be much stronger than mere conjecture or educated guesses. We have the vast literature of Arabic linguistic and grammatical observations from the classical era, much of it the result of field study (i.e. travelling to where the Arabs lived and studying their speech), we have the Quran, we have pre-Islamic and early Islamic poetry, we have inscriptions from the pre-Islamic and early Islamic eras, we have papyri from the early Islamic era, etc. We are also fortunate to be able to observe the twilight of Arabic's existence in its native enviornment in the Peninsula in circumstances very similar to what was present in the 7th century, and can thus test many of our theories about 7th century Arabic against the situation in Arabia in the early 20th century (pre-oil). So, there is in fact a lot more to go by than you think.
In fact, I sort of feel like his eminence Taha Hussein who, as you are aware, questioned the very authenticity of pre-Islamic poetry and even of the Hadith (but that’s another issue).
I don't want to go off on tangents here, but suffice it to say that the state of the art has moved on considerably since 1926 and thus most of Taha Hussein's theories in that book are now obsolete.
1. You asked about the origin and the cause for the emergence of the fusHa. In my view, the “origin” was the spoken dialects extant in Arabia. That’s where it came from.
So far so good ...
That is to say, a “lingua franca” was needed among the various tribes, both for communication and for solidifying the “oral traditions” handed down from generation to generation.
There is no evidence that such a lingua franca existed among the Arabs at that time or even that such a lingua franca was needed. Plus, if you look at the modern Arabian dialects (particularly in what is now Saudi Arabia and the GCC states, i.e. the area most associated with Al-FuS7a), the diversity of dialects was as great as, if not greater than, the diversity that is reported for 7th century Arabia. Yet, despite all this variation, the 19th century Arabs did not have a lingua franca nor did they have a need for one (nor could Classical Arabic serve this function as almost everyone outside of Mecca and Medina was illiterate). In fact, if you think a little bit about how life was like in our country back then, you'll understand that teaching people a second language on a widescale (to be used as a lingua franca or otherwise) would have been almost impossible anyway.
Most dialects in modern Arabia, despite all of the diversity, belonged to the same linguistic type. Traditionally, the grammar in Riyadh was substantially the same as the grammar in Al-Tayef. There were of course differences in grammar, but they were quite minor and did not impede communication. Most of the differences were in phonology first and lexicon second, and that is where most impediments to mutual intelligibility lay.
Now, when people composed poetry, the language in the poetry was not the same as that of everyday life. But that's not necessarily because the poetry belonged to a different dialect (though that occurred in some cases) or a different language -- the poetry is simply composed in a different
register. The dialectal differences are not necessarily ignored; rather, each person will adapt the poem to his own dialect because the dialectal differences are typically not of the type that would affect the metre, rhyme and meaning of the poem. So, a poem composed in Qatar would spread far and wide and be known all the way in Taif or Mecca, but would sound differently when read aloud, depending on dialect.
When a person from Riyadh meets a person from Hayel or from Al-Taif, they won't simply abandon their dialects and start speaking some separate "lingua franca," and they won't simply switch to the poetic register. What they'll do is iron out the differences and adapt their speech to each other just enough so that they can understand each other (which, in fact, is not a whole lot and mainly involves adapting the vocabulary ... certainly not enough to need a lingua franca). Of course, it helped that people were familiar with many words from many regions even if they did not use those words themselves. Some words did not even belong to a particular dialect per se but rather belonged to the linguistic heritage of the country. This is because oral poetry served the function that literature served in literate societies. Think of English: English-speakers use only a small fraction of the vocabulary that the language makes available to them, but they are always free to draw upon the language's vast vocabulary in their writing and they are exposed to far more words than they actually use in everyday speech.
The situation with FuS7a in the 7th century was largely the same. Most dialects in 7th century Arabia (apart from outlying dialects like those in upper Yemen) were sufficiently similar that people could communicate by making a few adjustments or adaptations to their speech (which people still do today), without the need for using a whole new third language (a lingua franca). When a poem is composed, or a speech is to be given for a solemn occasion, the poet or orator switches to the poetic register, which can contain prestigious features, words or expressions from other dialects but still does not reach the level of a new language or even a new dialect. The dialectal features were such that many simply do not appear on the written page, their presence or absence often did not affect metre or rhyme. So, a poem by Imrul Al-Qays can "scan" onto multiple dialects (e.g. a dialect that says "yaf3alu" or a taltalah dialect that says "yif3alu," etc.).
Now, I'll respond to some specific points you made:
The “dialects” were felt to be insufficiently “stable” for these purposes. A formalized, unchanging “variety” of Arabic was needed and so it developed little by little until at some point, it was “formalized” into the fusHa.
I'm sorry, I couldn't really get what you're trying to say here. Was this before or after Islam?
In fact, the fusHa pretty much serves similar purposes in modern times. It’s used in the written and media forms of communication and as a lingua franca throughout the Arabic speaking world. (But no one speaks it at home).
Assuming I understood you correctly, you're imposing a paradigm you're familiar with (the modern situation of Arabic in literate, urban societies) on 7th century Arabia. You can't just assume that there must have been something like MSA in 7th century Arabia just because that's all you are familiar with, nor can you assume that FuS7a in the 7th century served the same function as MSA does in the 21st.
2. You asked “what was the point of the “simplified” variety?” Well, that’s assuming the “simplified” variety developed from a “foundational” variety. My view is it didn’t. A “simplified” variety was always in use – in fact, a "simplified" Arabic was the original Arabic.
So, they synthesized a "complex" Arabic from original "simple" Arabics? That would not only have been pointless (it certainly wouldn't have helped communication!); it would have probably been impossible (how would it occur to people to simply create a more complex version of their language out of thin air? Where would they get those new complex features from?).
Or are you saying that they created FuS7a to preserve an earlier stage of the language and prevent their dialects from moving away from that archaic form? This doesn't help your theory because it does no more than push FuS7a back a little in time.