Real OGs remember that you could get fairly new AAA games for a song on, like, a random Wednesday. It was part of the initial appeal of Steam. Those explicitly went away because of the refund policy. https://www.reddit.com/r/Steam/comments/4pnd4p/psa_yes_there... (People were really upset at the time)
Their new refund policy is great, but it wasn't completely free to consumers.
The "played for less than two hours" refund policy is more of a compromise than great, IMHO.
It works well for games that are quick to run and enjoy. However, quite a few of the games I've played will easily burn two hours on loading, compiling shaders, watching unskippable branding animations (splash screens), tuning graphics settings, setting up key bindings, and working past miscellaneous bugs.
Steam's "play time" clock starts when the game executable is launched, and keeps running during all of that nonsense, even at title screens and menus. Some games have run past Valve's return window before I got even a minute of play time.
It would be nice if one of Steam's widely used APIs (Steamworks?) included a way for a game to register when it is actually being played, as opposed to loading or setting up or sitting at a pause screen. I think this would help with the return window problem, and finally make the played hours count on our Steam profiles somewhat accurate.
I always used the "doesn't work on my system". Though, most of the games I've refunded were really not working on Linux the way I'd like and I just didn't want to hack around or have to reboot into Windows for that game.
Don't forget the two weeks since purchase, which is especially nefarious as Steam banks on people buying many games through sales that they will only play much later.
Two hours is far more than enough to determine if a game is for you.
At least personally, I'd prefer having to wait a few months and having a good refund policy over more sales
I think more importantly for Valve though - the daily flash sales were incredibly important to drive engagement and grow their presence.
I think the "why didn't Valve offer refunds before" is kind of revisionist. It wasn't clear that refunds were even a necessary component of cheaper digital games at the time.