Those numbers represent inches --- but as has already been said, it only works when you get the deck leveled and set to the inch length that the dial is showing. The dial rotates an eccentric cam under the tractor deck ---- the dial should/can only be rotated with the deck in the full up position. The dial rotates easily if the deck is full up and you should feel a little detent at each height position. It is possible that the cam is no longer pinned to the shaft that rotates as you turn the knob above the tractor deck and or the spring is missing/broken --- you may want to look at what's happening under the tractor deck as you rotate the knob.
You asked what setting we mow at ---- my deck is adjusted such that the numbers represent inches and I typically mow anywhere from 2 1/2 to 3 inches.