If a list in iTunes is sorted by Name, or Time, or Artist, or Year, etc., etc., etc. -- then clearly dragging won't work. The order in those cases is determined by the fixed sort.
You need to click the leftmost column (above where the numbers are) to enable manual sorting. [note: as with the others, that manual sort can be reversed by clicking that column heading again. note 2: there are two arrows there these days... the first one (pointing either left or right) pops the album artwork out and in, while the second arrow (pointing up or down) is the one you're interested in activating.]
Here's a similar thread, including a graphical aid:
How do you manually sort the songs in iTunes' playlist?
