The windmill represents the decision about whether or not to expand communism.
In the early 1920s, Lenin started to get sick—deathly sick. And that meant one communist party was about to need a leader.
Cue Josef Stalin (Napoleon) and Leon Trotsky (Snowball) both waving their hands around in the air and shouting "Pick me! Pick me!"
One major difference between the two (aside from the fact that one was a possibly psychopathic dictator) is that Trotsky wanted to spread the Revolution in other countries, while Stalin wanted to hunker down and consolidate power. But only Stalin had the power to make his vision happen: he was General Secretary of the Communist Party, so he was able to convince people to support his campaign against Trotsky. After Lenin died, Trotsky was exiled. By 1928, Russia was Stalin's.
In Animal Farm, this whole kerfuffle is represented by the argument over the windmill. Snowball wants to build a windmill, but Napoleon (Stalin) hates the idea so much that he "urinated over the plans and walked out without a word"—and "the whole farm was deeply divided on the subject of the windmill" (5.10, 11).
So, why a windmill? Ever since Don Quixote (1605), windmills been literary code for impossible dreams. Orwell may have been a socialist, but it doesn't sound like he was expecting Karl Marx's vision to come true anytime soon.