I watched "The Village" recently. It was a good film, and reminded me very much of a short story by Ursula LeGuin called, The Ones Who Walk Away From Omelas. In both stories, the happiness of the villagers is dependant on a terrible lie.
In Omelas, the town is perfect, a utopia in whatever your sense of the word might be. LeGuin goes to great lengths to make the reader think about and define his/her own idea of a perfect world. She gives a lot of pointers, and a lot of different plausible scenarios, including things like how sex is viewed by both men and women and how it could be perfectly acceptable by both sexes. People could have sex in public if they wanted, but no one would ogle them or turn it into an unnatural thing. Or the drugs people chose to use would only be mind altering, not physically altering, thus not addictive or dangerous in any way. Opium wouldn't be over-used and cocaine wouldn't be anything anyone would need in order to make it through the day. If the kids wanted to try it on occasion, in your idea of a perfect world, at least it would never be abused.
A little over halfway through the story, though, the reader would be introduced to the catch. Just like a little short of adulthood, the townpeople would each individually be introduced to the reason for their happiness.
There lives a little girl in the basement of one of the houses in Omelas. She lives there in her underwear, eating just enough food to survive, sleeping in her own feces. She's secluded from anyone who may have once loved her and is resigned to the feeling of the dank cold of the basement floor and the disgust she sees in the eyes of the ones who have to look at her. In the end, most of the residents of Omelas are willing to accept her life as a sacrifice for their own. So, they perpetuate the lie by ignoring the sight of her face in their heads while they try to sleep at night. Others decide not to accept this horrific reality. And they simply walk away. LeGuin doesn't preach, nor does she try to show the reader how horrified these people must be, for their feelings must be too unsettling to put into words.
In "The Village", the children are raised under a similarly false pretense. They're taught not to speak of the things that lurk in the woods surrounding their houses. They are told never to speak the works, never to wear or see the color red, for it attracts those that lurk and threatens their safety. The entire first half of the story shows the lengths the elders are willing to go to keep their children happy. They lie, use scare tactics, anything to keep their babies naive and innocent beyond their years. There's no doubt that the children are happy, but they have no idea how limited their happiness is, how dependant it is on the lies of their parents.
One difference between the movie and the story by LeGuin is that, in the movie, the children aren't shown the reason for their happiness. I believe Shyamalan simply did not take the plot of the movie that far into the future. Eventually, the children will have to be told, to carry on their families once the elders have all died. Since this is just the first generation of children living outside the city, secluded from the rest of the world, the elders haven't had the opportunity to live far enough into the future. It's only when the blind girl decides to get medicine for her boyfriend does one of the elders decide to let her in on the secret. There is nothing to be afraid of in the woods, he tells her. He proves it by showing her their hiding place. The cost of her happiness was a terrible lie. She is the only one they tell, though. She's more mature than the others. Because she's blind, they weren't able to protect her like they did the others. Again, like the people of Omelas, their intentions are good. They only want to create a happy world, safe and not full of untimely death and disappointment. But regardless of their intentions, the outcome is the same. As a result of a falsehood brought on by the people they were supposed to trust and rely on for the truth, the children never learn to trust in themselves, never learn the true meaning of humanity.