They simply disconnect the drive shafts from the hubs so that in rear wheel drive and with hubs disengeged (unlocked), the wheels do not turn the drive shaft, differential or propshaft from transfer box. Significantly less drag.
To use 4 wheel drive, you need to turn them to locked position. If you forget, it will not do any harm but the front wheels will not be driven.
VERY IMPORTANT - always make sure they are both locked IN or both locked OUT!!!