What does John 8:33 mean?

The "they" referred to here is a collection of Jewish religious leaders and their followers. Jesus is debating them in Jerusalem during the Feast of Booths (John 7:1–2). Prior to this moment, Jesus has claimed to be "the light of the world" (John 8:12) and therefore the only source of spiritual truth. In the prior verses, Jesus reemphasized this point by claiming that those who "abide in [His] word" are those who know the truth and are set free by that truth. Later, He will clarify that those who have not accepted this truth are still slaves to sin (John 8:34). The response from the hostile crowd is not merely bizarre, it demonstrates a lack of insight.

The "freedom" Jesus has spoken of is spiritual: those who reject Christ are still enslaved to sin. This results in both eternal damnation and earthly consequences (Romans 1:21–32). The people who remark back about their freedom seem to think that if they are not actual slaves, in a social sense, they have no need to be freed. In this way, their reaction proves that they do not understand the point Jesus is making.

The absurd side to this argument is that it ignores both Israel's history and her current situation! In the past, Israel was often subjugated to other nations—the entire book of Judges describes the nation's cycles of sin, oppression, and rescue. At one point, the vast majority of the Jewish people were carried off into captivity (Daniel 1:1; Esther 2:5–6). And, most obviously, the nation of Israel had been enslaved by the nation of Egypt prior to the events of the book of Exodus. At the very moment these words were spoken, Israel was under the absolute control of the Roman Empire. It's mind-boggling that they could claim to have "never been enslaved to anyone." Then again, so is their inability to recognize their enslavement to sin.