Just because PETA is against something doesn't by definition mean that it's wrong. If a fool says the sun comes up in the morning, that doesn't make it not true.
I'll admit to ignorance on the functional structure of the yorkie, I had not heard that about the top knot before. Though why couldn't yorkies have also been bred for fat tails?
Anyway, I think the good has to be measured against the bad. For instance, we remove dogs' sex organs for health and also to prevent overpopulation, even though this is also removing a body part. In this case, I believe the good far outweighs the bad, though some people disagree. But today, there is no reason besides cosmetic to remove a tail. If the tail is dragging through the mud, it seems like there's an obvious solution - keep the hair shorter.
The dog's tail functions as a rudder when running, helps them swim, and is a fundamental part of their communication. Weighed against... "tradition says we dock tails." Again, I can't see why someone can say it's "perfection" to cut a tail off (or for that matter, leave it on), because that is purely subjective. "Platinum" yorkies are very beautiful, but a show breeder would say it's not standard. Why isn't it standard? Because it's not traditional. To me, docking is obviously about the traditional look, and why not progress with the times and we learn more and strive to become more humane in our treatment of animals?