Yes this is proper operation. With a 4 wheel drive with manual hubs, the system will not work unless the transfer case (shifted from the lever on the cab floor) and the hubs (locked in at each wheel) are engaged.
On vehicles with automatic locking hubs, the hubs will lock when the transfer case is engaged and then the vehicle moves and locks in the hubs.
On newer vehicles, the system is a little different. Usually an electric motor or actuators lock in the transfer case and front differential when 4 wheel drive is activated.
Keep in mind, in 2 wheel drive, the front axle still spins and so will the forward drive shaft, along with the internals of the transfer case. Switching to 4 wheel drive and locking the hubs is what completes the system.