This time it's serious: The Edinburgh Fringe comes to terms with a bruised Britain

It must have seemed like a good idea at the time. On the opening night of the Edinburgh Festival Fringe, the Fife-born artist David Mach gathered the great and the good of the Scottish art scene around him, in a courtyard at the Edinburgh College of Art. In the centre stood a bust of the Devil, made out of thousands of brightly coloured matches, which Mach ceremoniously lit with a cigarette. It burned demonically for several seconds before the artist extinguished the flames. He then shipped the ash-grey head to the City Art Centre, where it is the centrepiece of his Bible-themed exhibition, alongside an as-yet untouched – and highly flammable – matchstick Jesus.

Little could anyone have known that just 24 hours later, London – and parts of the rest of the country – would be burning. The riots and looters did not get as far as the whimsical wynds and Morningside mansions of Edinburgh but on the Fringe, you could feel the heat.

Usually, to be in Edinburgh in August is to spend a month blissfully insulated from reality by a blanket of endless shows and sleeplessness. The outside world rarely gets a look in. This year, though, it was impossible to ignore. The riots were all anybody was talking about in the queues before shows and in the bars after. Twitter feeds, normally full of retweeted four-star reviews, were taken over with updates from the streets. Above anything else, 2011 will go down as the year that the Edinburgh bubble burst.

Many comedians reacted quickly, as they are wont to do, with deft one-liners. The American comedian Hari Kondabolu's wisecrack was typical – "Apparently when the riots in London began, sales of baseball bats went up 500% on Amazon's UK website. This means people wanted to commit violence with bats... but in three to five working days."

None, though, incorporated events into their routine more swiftly and seamlessly than Andrew Maxwell, who adapted his straight-up, man-and-mic set to include a live news feed from his phone, so he could react to events as they happened.

"Such is the festival mindset that my first reaction wasn't, 'My house is only round the corner from there,'" said the Irishman. "It was, 'I'm going to have to rewrite my show.'" By the time I saw Maxwell's show, on Sunday evening, he had jettisoned almost a third of his original set and kicked things off with 15 minutes or so of jokes about the events, including the observation that "Scotland is too damp to burn" and his concern that at the London Olympics, the competitors wouldn't know which gunshot to start the 100 metres on.

Elsewhere, in one of his four shows on the Free Fringe, Robin Ince drew an over-capacity crowd to the tiny Buffs Club (a strange, backstreet Masonic lodge). They perched on tabletops, floor and windowsills, like students at a sit-in. Ince wondered if there might be a link between the riots and the festival: "It's interesting timing, how the riots started just after the Fringe began. Perhaps Simon Callow and the National Youth Music Theatre are the only things keeping us safe in the south. 'Has Callow gone up? Yes? Let's burn down Argos.'"

Josie Long, whose show focuses on "anger and politics" (her words), is writing new material every day, reading from her notebook as she goes along. It's a "bespoke" show, she says, for a particular situation. "To be honest, I feel a bit uncomfortable being a comedian at this time."

Long's set (of which more later) begins by relaying a conversation she had with a friend, who declared that a few tough years under a nasty Tory government might be a good thing, because "good art comes from political anger". "Well," retorts Long, "I'd rather have schools and hospitals."

But even before the riots began, the Fringe felt newly, invigoratingly engaged with the outside world. There are still plenty of whimsical comedians, puppet shows and site-specific theatre adventures to enjoy, but it has been shows about politics and politicians, about Lehman Brothers and the Las Vegas crash, shows with titles like Dislike! A Facebook Guide to Crisis or Pointless Anger, Righteous Ire, that have drawn the eye. In 2011, there are more of them than ever before, spreading out across the art-forms, from theatre to stand-up and performance poetry.

In the theatre, the most exciting writing has come from young talents like EV Crowe, whose Young Pretender gets inside the surprisingly modern head of Bonnie Prince Charlie, in order to probe the manipulative charm of leaders, and Adam Brace, whose Midnight Your Time, performed by Diana Quick and a laptop, has interesting observations on the baby boomers and the limits of political activism bubbling under the chatter.

According to the artistic director Dominic Hill, this year's Traverse programme is dedicated to "big ideas and epic storytelling". Malaise is everywhere you look, from Mark Ravenhill's song cycle about the Great Plague of London, Ten Plagues, performed by Marc Almond, to Zinnie Harris's atrocity-strewn fairytale, The Wheel, set in war-torn Spain. For a physical embodiment of the poor shape we're in, there was Dance Marathon, a three-and-a-half hour endurance test for cast and audience inspired by Depression-era events that saw couples dancing till they dropped, for a cash prize.

The theatre's best offering, though, comes courtesy of the playfully experimental New York troupe the TEAM. In Mission Drift, a bonkers, brilliant hybrid of play, jazz gig and cabaret act, a five-strong cast (plus band) present a potted history of capitalism and the founding, and foundering, of Las Vegas, through the story of two pilgrims – a laid-off casino waitress and a homeless Native American.

Dedicated to creating work that "dissects and celebrates" 21st-century American life, the company spent a month living in a foreclosed home in Las Vegas, watching the housing crisis and economic decline in lurid close-up, interviewing bankers and visiting failing timeshare developments. And so, live on stage, with a little help from Elvis, a talking lizard and a beauty queen, the American Dream materialises, flourishes and withers, all in the space of two hours.

Over at the Pleasance, Spent tackles financial meltdown (bowler-hatted) head-on. In an extraordinary hour of physical theatre, a couple of rubber-faced Canadian clowns, Ravi Jain and Adam Paolozza, combine slapstick, satire and economic analysis as they play over 30 characters affected by the crisis. Lehman's chief executive, Richard Fuld, is put on the spot – "The system worked for you but it did not work for the rest of America" – down-and-out bankers beg for work and the international media whips itself into a frenzy. Holding the whole farrago together are two suicidal Lehman traders, whom we meet at the start, holding up cardboard signs saying "Hire Me!" and "Will work for $6 CDN". A Vladimir and Estragon of Bay Street (Toronto's Wall Street), they lead us through the existential lows and mystical highs of financial life. If it descends into silliness in parts, we are reminded that the jokers in the big banks are to blame for that.

Comedy, too, is far more switched-on this year. Previously apolitical stand-ups, like the affable Tiernan Douieb, have taken it upon themselves to "clean up the world's mess". Former Labour political advisers (Matt Forde) and stockbrokers (Damion Larkin) have taken to the mic to share their passion for politics, economics and good banter. And whole shows have been dedicated to Ireland's fiscal woes, including Keith Farnan's Money, Money, Money and Abie Philbin Bowman's Pope Benedict: Bond Villain.

It used to be that Political Animal (Andy Zaltzman's regular night at the Stand) and News Revue were the only stalwarts of satire on an increasingly disinterested Fringe. This year, both look increasingly redundant. News Revue is a slick, soulless tits-and-teeth hour, inviting audiences to "hold hands with Gaddafi and take a Tripoli [ha!] through the events of the last year" – which are, oh joy, belted out in song and silly wigs. It covers everything from Harry Potter and Harper Seven Beckham to the Chilean miners and Maddy McCann and is fairly crass about it. I quite liked a sketch which cast the Miliband brothers as two rude boys (played by girls) and a Chicago-styled phone-hacking yarn. And there's a rather nice duet for Clegg and Cameron, sung to the tune of "I Am the Walrus". "I am D and he is C and we're all in this together. I am the Clegg man, I joined the Tories," etc. (Hum it – it does work).

The new political comedy is far subtler. And, though she'd probably loathe the term, Josie Long could be its poster girl. She may make jokes about Cameron and Co forming an "80s tribute government", but this is far from 80s tribute comedy. It's charming rather than clever-clever, smiley not smug, more revelatory than ranty. At the end of her show last year, Long introduced her new political focus. It was all passion and raving – and not particularly funny. She is still angry – "I'm living with anger I've not had to negotiate before. I dislike Boris Johnson so much, I can't even enjoy London's bikeshare scheme" – but she has spent the intervening year honing her impassioned beliefs into a witty and thoughtful hour.

Long's show takes in everything from the Royal Wedding to the coalition and her own experiences at the student protests with UK Uncut, but it also mercilessly examines her own knee-jerk opinions. "I'm better informed about politics than I've ever been," she says. "I follow a lot of people on Twitter and I don't have a job." To help the political medicine go down, there are interludes in which she talks about Jedward, the Brontes and things she likes. It is intelligent, inspiring and exciting to watch.

Andrew Maxwell wraps his anger in a similarly affable and amusing package, hopping about the news agenda as he sips on water poured from a crystal decanter, kept in his on-stage drinks cabinet. A laid-back Irish raconteur, he is at once furious and too old and lazy to riot, and as a "conflicted suburban father of two" he describes his reaction to the student protests as "I would love to attack the Ritz... or stay in the Ritz." His set, tackling sectarianism, Tahrir Square, "that sun-kissed hustler" Tony Blair and phone hacking is being talked up as a contender for the Edinburgh Comedy Award – and rightly so.

W Kamau Bell is more explicit about his political material – his show title declares an intention to "end racism in about an hour." The comedian is best known for cracking the first joke about Barack Obama, in his native America, in 2005. "There will never be a black president named Barack Obama. Ladies and gentlemen, that's too black."

His Edinburgh debut is a fascinating, good-natured hour which dismantles terms like "post-racial", pokes fun at the British census and wonders why People magazine's Sexiest Man Alive is never an "obvious ethnic". The show's premise – that race doesn't exist – is given a personal conclusion when he talks about his baby daughter.

"My wife is white and I am black and when our daughter was born she came out white... with my nose. But she's getting dark everyday so now I'm charting her colour changes using the cover of Michael Jackson albums. Yesterday it was Dangerous. Today it was Bad. Maybe tomorrow she'll be a Thriller. And now she's at a weird point – when I hold her she looks white but when my wife holds her she looks black. Kind of like a broken chameleon."

"This is not a strident lecture," he tells the room, but you leave the room having learned – and laughed – a lot.

Elsewhere, Imran Yusuf, who was nominated for the Best Newcomer Award for his debut last year, cuts a slimline dash in white linen suit and patent black shoes. Born in Mombasa, he grew up in Hackney Downs, or, as he puts it, he was "born in the third world and upgraded to the ghetto".

Bursting with confidence and smooth patter, "the spirit of Malcolm X in the body of Mahatma Gandhi" has strong words for those who believe that multiculturalism has failed. He points out the advantages of his diverse upbringing (you can swap the teams you support, depending on the sport) while poking fun at the stereotypes. Why do people always insist on asking him what his parents think of his chosen career, he asks. "My Mum doesn't know I'm a stand-up, because my Dad doesn't let her out of the house."

Dave Gorman also incorporates a wonderful section about bigotry into a technologically adept show which is as full of quirky charm as it is of surprising anger. In a "found poem", performed to the national anthem, he reads out online comments found below a Daily Mail article about Union flags for the Olympics being made by a French factory. Elsewhere, taking his stance as a "middle-aged, middle-class man from the middle of the country", he unpicks the aspirational, mainstream advertising that is directed at him, from the fake Twitter accounts featured on the screens in Apple adverts to the absurdity of 72-hour anti-perspirant.

Amongst all of this, though, it is the performance poets and their strange hybrid of comedy, theatre and rap who have best given voice to the experience of living in 21st-century Britain. Tim Clare's How to be a Leader at the Underbelly is a wild-eyed, brilliant hour dedicated to the rules of ruling – never let them see you bleed, have an awesome origin story and grow some ovaries, to name but three. He talks about Papa Doc and cult leaders, raps about Joan of Arc and Elizabeth I – "I rain flames on your lame Armada/ You may be hard/ But I'm harder" – and occasionally plucks from "the tree of low-hanging fruit", to poke fun at Clegg and Cameron.

Clare also uses the audience as pawns in his power play: he threatens them with water pistols, promises Frazzles to the hungry and Kinder eggs to the best, thus creating, he says, a disaffected middle class who don't deserve hand-outs but will never win the top prize.

Clare is a member of the Aisle 16 poetry club in London,with Joe Dunthorne, John Osborne and Luke Wright, who brings his searingly brilliant Cynical Ballads to the Fringe.

Dressed like a City boy, Wright spits out his ballads of Broken Britain like Plan B without the beats and falsetto. His narrative poems, performed to a backdrop of Sam Ratcliffe's Hogarthian grotesque cartoons, run from binge drinking to Britain's Got Talent (a more fitting statement, says Wright, would be Britain's Got Problems, or Coastline or Debt). There are tragic tales set on council estates and romps about extreme SKIers, parents "Spending their Kids' Inheritance" on "Bolly, Botox and trekking in the Andes". There is a thinly veiled ode to Boris Johnson in "The Rise and Fall of Dudley Livingstone" and plenty of railing against Etonian politicians and a "government we can't afford": "If you're wondering what the moral is/ I'm afraid I'm wondering too/ Trolls like this will always win/ There's nothing we can do".

Here, in a damp cave at the Underbelly, in the middle of the afternoon, the indignant, inspiring spirit of the 2011 Fringe is burning bright.