This method of measurement breaks down when you look at the history of football as a whole, though.
So much about the way the modern day game is played has improved massively. Fitness, diet, tactics, data, preparation & organisation, the list goes on.
If you base how good a team is solely on their league achievements in their own time it leads you to absurd conclusions, such as that a title winning team from 1920 are 'better' than the current Liverpool side (who haven't won the title), when in reality if they played each other the older team would get steamrollered.
You can redefine 'better' as relative to their time if you want, and I understand why you might do that, but I think the only reasonable way to judge is to consider all the factors involved.
No it doesn't break down. In my view the opposite is true. The theory stands up even more. The fact that the game has moved on over the years actually emphasises even more that a side can only be measured against it's contemporaries.
You can only beat or lose to the sides that are around in your particular era. Comparing them to sides of different eras is guesswork and our conclusions are usually based on our own personal bias. IE - we all have our favourite United sides and will argue black and blue that our particular favourite is better than those of any other era.
Yes, you can make an argument to say that the superior fitness levels of today's side might see it beat sides from the past. However, that ignores the probability that if those sides from the past entered a time machine and were moved into the present they would have to undergo a different training regime. They would be fitter, the tactics employed would be different, etc. Who is to say they would not beat today's side? Bassett's sides often beat sides of their time that were considered to have more progressive tactics and to be far more skilful.
The John Harris side of the early 1970s gave us a lot of pleasure and was full of very skilful players. From November onwards the pitches of the time were usually like bomb sites. The ball was heavier, and yet they often produced very entertaining and skilful football. But if transported to the future, could it beat today's side without undergoing today's training regime. Possibly not.
But on the flip side, how would today's side perform if sent back in time to play on those pitches and with that ball. Also could they cope with the vicious (often unpunished) challenges that went on back then? Who knows?
the fact that pitches, balls and even the kit are different, the fact that the tactics and fitness levels are different emphasises even mare that you can only be measured against the sides that are around in your particular era. To say that a side from the past would be steam rollered if it played a side from the present is supposition, because the side from the past would be trained differently if around now and would be playing in a different environment.
It's all opinions, but in answer to the original post, I feel the last time we had a better side was under Warnock, because it finished higher up the league than the current side.