To add to what
Xerrop has said - the campaign AI in MTW is not
better than that in later games - it's simply different. STW/MTW's campaign AI only had to deal with a set number of simple provinces where a move involved transferring a piece from one of these provinces to another and hitting "end turn".
The campaign AI for later TW games has to deal with a much more complex map, economic and diplomatic model. This really did show in RTW/M2TW where it was clear that the AI could not handle the map nor many of the additional campaign map features. Also in RTW/M2TW the diplomatic and military AI were two separate entities often working at cross purposes - this is why you'd have e.g. an Egyptian diplomat asking for a ceasefire every season while an Egyptian army repeatedly laid siege.
The campaign AI in MTW also does some stupid things. Most notably, it is unable to effectively direct and coordinate trade shipping lanes. It also doggedly techs up a province, often putting itself into the red, to fill the requirements for training the provincial valour bonus unit (i.e. Chivalric Knights from Toulouse, Nizari from Syria, etc). There is also the problem that single province factions such as the Aragonese usually end up stuck in their starting province and bankrupted from supporting all those heirs, etc. The campaign is also full of serious imbalances with regard to the unit rosters and starting positions of factions. Features that the AI cannot exploit such as retraining, disbanding, razing buildings and hiring of mercenary units also add to the problem. These features become nothing more than "toys" if the AI opponent cannot also use them against you.
Battle AI is another matter, this has been covered countless times, but the battle AI in STW/MTW is notably superior to that found in RTW/M2TW.
I may well be biased, but it's my firm opinion that STW original had the best balance in terms of unit roster and equality of factions. The problems began in the Warlord Edition where "features" such as retraining, disbanding and razing were first added to the game and imbalanced units introduced.
In my humble opinion, the best TW game would be STW (original) built on the MTW game engines with retraining/razing/disbanding and v&vs either removed or made to work correctly for both the player and AI.