In ReCAPTCHA, the two-word CAPTCHA version, one of the two words is taken from a scanned book. That (unknown) word was one that failed OCR for that book.
The other word is one that captcha already knows the answer to.
The assumption is if you get the known captcha correct, then you probably got the other one correct as well (if it was possible to read it). The answer to the unknown word supplements the OCR of the book.
The captchas are put in random order, and you only have to get one of them right.
Luis's thought was that people are wasting all this time doing captcha - why not use that time to do something useful, like help digitize books.
As an aside, he's also one of the principal people behind duolingo, which is a quite awesome language learning / human-assisted translation engine.