How do computers work?

While this is a rather broad question, I got asked some specific questions in this area and I wanted to provide some starting points which cover specific topics in this area.

How do I create a computer processor?

Your first CPU — a comprehensive guide with source code implementing a standard fetch-decode-execute-store processor.
Wikipedia: Verilog

How do I make a computer language?

PL/0 Language Tools — a simple parser and interpreter for the PL/0 programming language.
Register Machine Interpreter — a turning complete programming language.

How do I create an operating system?

Learn how to make a simple Operating System — compile and boot your own simple operating system.