"I would argue that working hard on your YC application is working hard on your company."

This is exactly wrong. There are two types of questions on the YC application:

1) the ones about you as founders, and 2) the ones about your business

Spending time thinking about the first type of question (e.g. "Please tell us about the time you most successfully hacked some (non-computer) system to your advantage.") does not help you build your business -- not in the least.

And if you spend time building your business (i.e. talking to customers and building your product), then you'll be well prepared to answer the second kind of question.

You have it backwards. Working on your YC app != working on your business. Working hard on your business, however, is the best thing you can do make your YC application successful.