There's a famous story of the first day of term at the Bauhaus school, when László Moholy-Nagy asked the new intake of students to make something out of a sheet of paper. An hour later he came back to find a profusion of swans, skyscrapers and doilies. He looked disdainfully at them until he came to a student who had simply taken his sheet, folded it in half and stood it up on his desk like a greeting card.

Moholy-Nagy pointed to it, praised it and presented it to the class. This was the one, he said, a design which uses the natural capabilities of paper, its foldability, its strength, its simplicity to create a structure that could only be possible in that one material. It is possibly apocryphal - though it sounds likely - but it embodies a curious contradiction at the heart of the Bauhaus, a cocktail of po-faced asceticism and a kind of self-conscious parody of its own seriousness.

The Bauhaus - currently the subject of a major show at London's Barbican Art Gallery - is remembered as the high-minded, German throbbing brain of modernity, a school which embodied the social, philosophical and aesthetic concerns of a movement which sought to change the world, to create a new language of design for an industrial proletarian age and which actually ended up making art objects for a wealthy and educated bourgeoisie. The seriousness of its founders and leaders, the architects Walter Gropius, Ludwig Mies van der Rohe and Hannes Meyer, radiates from their portraits. These were serious men, scarred by their experiences in the First World War, and determined to radicalise design.

The 'Bauhaus: Art as Life' exhibition at the Barbican, designed by architects Carmody Groarke and graphic designers APFEL, attempts to humanise that image of a technocratic will to modernity through a series of personal effects, portraits and stories of the extraordinary range of individuals - many barely known beyond academic circles - who studied at the short-lived design school, which became the most influential the world has ever known.

They also bring to light a little publicised aspect of life at the Bauhaus: humour. The early years of the school were seeped in a strange stew of expressionism, Zoroastrianism and theosophy, and cultish, shaven-headed and robe-clad oddness. It was, at least in its early years, nothing like the modernist machine of myth. Instead it embodied something of the intensity of Weimar culture - it started off in that city, home of the new German republic in the wake of the horrors of the First World War.

Although it might have slowly become more harshly modernist - notably when it moved to Dessau in 1925 - it always retained as its core elements that Dadaist sense of the ridiculous, an ability to parody its own conventions (in private at least) and a fundamental humanity that was in contrast to its stark design output. It was in the activity of the everyday that this lightness emerged, rather than in the production of design.

Catherine Ince, curator of the Barbican show, says: 'We're trying to look at the Bauhaus as an art school, rather than trying to post-rationalise it into a design moment. We've tried to gather together the more personal items: presents the students made for Gropius, photography of extracurricular activities, invitations and graphics for balls and parties.'

Those parties, in particular, must have been extraordinary. There were four 'official' parties each year, elaborate affairs with stage designs by Oskar Schlemmer (head of the theatre workshops); monthly masked balls, for which students made their own, often outrageous, costumes, with music by the Bauhaus' own jazz band; and 'kite parties', in which students competed to make the best kites (some of which were, apparently, too beautiful to actually fly - functionalism, eh?).

The Barbican is showing Herbert Bayer's 1922 Kite party invitation with the letters arranged as a fluttering tail to a slightly Gilbert and Sullivan caricature, as well as another charming invitation by Rudolf Baschant that looks a little like the Clangers' Soup Dragon. And there were costume parties in which students dressed in geometric outfits, poking fun at the workshops' functionalist production. Some of the costumes were close to the anarchic spirit of Dada, including a tubular half-man, half-pantomime horse, his back-end a bicycle. At a 1929 Metallic party, the guests were wrapped in foil, the tombola prize was a Kandinsky painting, and the invitation a gorgeous graphic work by Johan Niegemann.

Puppets, and other geometric toys, also formed a fascinating part of the output of the workshops. Schlemmer's haunting, toy-like Michelin Man figures still look oddly radical - his Triadisches Ballet was a very direct inspiration for Philippe Decouflé's mesmeric 1987 video for New Order's 'True Faith'. Paul Klee's son, Felix, was already at the Bauhaus at 14 and his puppet shows sent up the school's largest characters. 'Students and teachers went along to Felix's puppet shows', says Ince, 'to catch up on the latest gossip.'

There may have been a much-commented-on incipient sexism in ghettoising the Bauhaus ladies into designing and producing textiles and toys but their output was nevertheless extraordinary - and long lasting. Alma Siedhoff-Buscher's 1923 boat-building blocks set is still in production, as is Margaretha Reichardt's string-pull puppet and peg-doll set (all produced by Swiss manufacturer Naef). You do, however, get the impression that these are toys more to please the design-conscious godparents who buy them than the children they are being given to, though at the time their abstract shapes and bold colours must have appeared spectacular.

But the chess set on display at the Barbican (Joseph Hartwig, 1923, also still produced by Naef) is a work of absolute genius, an abstraction of an abstraction which becomes pure, gorgeous sculpture. 'There was an idea of the genius of the child, of the desirability of a return to the pure state of childhood with life and art and play all being one,' explains Ince. The Bauhaus was always struggling financially. The parties slowly became more about fundraising than fun, and the increasingly vehement antagonism of the Nazi regime sealed its fate.

The school will always be remembered for the crystallisation of a moment when design began to be taken seriously. Yet the endless photos of young people dressed up in silly, inventive clothes, fooling around, give a glimpse of the humanity so often seen to be lacking in a modernism characterised by its dedication to a machine aesthetic and a dry vision of endless utopian blocks of worker housing. The Barbican's show helps put the fun back into functionalism.