Long argument

The other night I was sitting around a campfire with my uncle and a friend of mine. Me and my buddy are both into Supras, naturally, and my uncle grew up with muscle cars and has been a mechanic at a shop for almost 12 years, so he knows what he's talking about. We got talking about cars and I said Supras will rule the world, so he asked why. I said there are a bunch of 700, 800+ rear-wheel horse supras. He proceded to go on about how that is crap, the engine only puts out like 350hp, but since it is measured at the rear wheels, and it goes through the drivetrain, horsepower is multiplied by the trans. and diff, so it seems like it has tons of power whenreally it doesnt. I argued, saying it doesnt matter when it goes through, it can never make more power AFTER going through hears then before. You cant "make" power, if anything it would be weaker.
Then he explained it this way:
Horsepower is a function of torque and RPM. Your engine puts out so much torque, and at a certain RPM (say 5500), you have so much horsepower. At 3000 rpm, you have less horse than at 5000. I was with him so far. So one horsepower is is the work required to move so much weight a certain distance. If you hooked a pully up to the crankshaft of an engine (so, not going through any gears), to move, say 1000lbs 10 feet, would take so long at 2000rpm, and less time at 5000rpm, since you have more horsepower. If you put a tranny on that, and put it in first, it would pull very slowly (low HP), but put it in 5th and it would move it quickly (high HP). His point was that, at the wheels you will have MORE horsepower than at the crank, so in his opinion, a 1200 RWHP supra only has maybe half that at the crank. My opinion was you cant gain horsepower by gearing, and a 1200RWHP supra has MORE HP at the crank and loses some through the drivetrain. His final argument was this; if he were to try and lift an engine block (or some other heavy thing), with a rope slung over ONE pully, it would be relatively impossible. A persons arms (representing the engine), has so much strength available to lift with (torque) with no assistance. If you used a triple pully (transmission gears), you could easily lift the block. Hence, it seems that you have more strength than you have. If you were to measure the force applied at the end of the rope (rear-wheel horse), on one pully you can only apply a minimal ammount of force, but through multiple-pullies you can apply much more force. That is how they claim to have 1200 horsepower. Now he had me. So what I dont know is, on a dyno, what gear do you run in? Do they take gearing into account? Can you measure crank-hp?