Luke has heard of the Clone Wars, so he must of heard of the Jedi. With the passage of time, (and likely Imperial disinformation) the specifics could get lost. If Luke was home schooled, Owen might have also put some filters on the materials he was using.
Nobody in the cantina seems to act like they've never heard of a lightsaber before, although they may never have actually seen one used.
Also of note is Han's dismissive attitude towards Luke's training aboard the Falcon.