The accident with the bike put Ash into a coma. Days later he was found and was hurried to the hospital and treated with heavy medications, which is why Team Rocket became less menacing. The medication took effect and stabilized his coma dreams so that instead of being terrifying, they became idyllic, allowing him to live out his Pokemon master fantasies.
After the beginning episodes, the series is the result of Ash's subconscious mind fulfilling his desires, as well as attempting to escape reality. Should Ash realize he's in a coma, he would wake up, but suffer brain damage, so he must take down all of his mental barriers one by one until he can come to grips with who he is and escape his coma (since his mind will not allow him to escape until he's come to terms with himself).
Further evidence comes from the realization that even though his journeys take him vast distances, he never travels on a bike due to having developed a phobia.
The coma and fantasy explains why he doesn't change much physically. It also explains the worldwide socialism, as he thought up a safe system of government that would run smoothly and keep the world going, allowing his adventures to work like they do. It also explains how a child can go off on his own into a world full of dangerous and untamed animals, and why town has the same police officer and every Pokemon centre has the exact same nurse. Joy and Jenny he knew from his hometown, and they act as a safety net or anchor, allowing him to feel safe no matter where he goes. Joy and Jenny represent stability. The professors represent Ash's ideals, which is why Gary became a professor. The fantasy also explains why every time he enters a new region, virtually no one has heard of him, despite his conquests. How could Paul, the rival of the Sinnoh area, not know of someone who has placed in at least the top 16 of all three leagues and has destroyed the Orange League and Battle Frontier?
Moving on to the characters closer to him, Ash's traveling partners are aspects of himself that he can enjoy, but doesn't like to associate with himself. Brock is Ash's repressed sexuality. Ash fell into the coma a virgin and needed an outlet for his growing sexual frustrations -- since he can never experience sex, Brock must never succeed. But Brock isn't just a projection of Ash's sexuality, he is also a projection of Ash's fatherly instincts. Brock leaves his siblings to journey with Ash because Ash can't cope with having that much responsibility at his age. Brock's stay with professor Ivy was an attempt to outright suppress his sexuality. You may notice that James got much more dialogue in this part of the series, as well as getting more touchy feely with his Pokemon and exposing most of his backstory. Ash didn't enjoy this much, which is why Brock comes back horrified and refuses to speak about it (Ash's subconscious was repressing him at the time, so other than a general feeling of dread, he has no idea of what happened). Further evidence of Brock being Ash's sexuality is that he keeps returning to the series after Ash meets a new girl aspect of himself.
Misty is the first such aspect we encounter. Because she is the first and because she is merely an aspect of Ash are explanations for why Misty plays so prominently in the show but is ultimately unattainable (because he never really knew her before the coma). Since Misty is his initial love interest -- if only subconsciously -- he needed her to reach a certain level of womanhood. He felt that people could only have relationships after they've matured. In practice, though, he finds that he can't cope with it (lacking the real-world experience) and wants the normal pushy, arrogant Misty he knew, thus not letting her keep Togepi. We can see this arc in the constant berating of his sexuality (Brock), but her eventual mellowing until she had faded into the background. Since Ash was quite attached to her, this was traumatizing and after this experience, anyone around him "threatening" to mature quickly ends up leaving for another, more naive fill-in.
Gary Oak is what Ash wants to be. He is wish fulfillment. He succeeded, and then settled down to a normal life. Ash needs someone to succeed in his world or he won't be able to validate it and will start questioning why he is where he is. It's a subconscious trap to keep him from becoming too aware of his situation. His mind must have figured out that awareness of the coma would snap him out of it, but it would cause brain damage, so it took something the boy already loved and built a way out for him with it. However, Ash is too complacent to make a final stand and fight his way out of it, and so cannot escape. This is why he keeps encountering Legendary Pokemon. They're his mind's way of showing him he can do great things if he tries, and it's a way to encourage him to push forwards.
Team Rocket are the qualities of himself that Ash deems "negative" but is coming to terms with. Jesse and James want to appease Giovanni, Ash's father figure, and Jessie will trick the submissive James into doing her bidding to achieve this. Meowth especially wants to appease him because he remembers the good times with Giovanni. This places Meowth in a category known as Ash's (corrupted) innocence. This is apparent because Meowth is able to speak. In fact, the whole reason Meowth can speak is so that Ash can eventually accept the aspects of Team Rocket as parts of himself.
Ash has issues with his father, so he put him atop the evil corporation and demonized him. There may be an actual Team Rocket (in the real world) but it's doubtful that Ash's father is their leader. Ash likely feels that the split between his parents was partly his fault, but also partly blames his father. The split caused his mother to move out of the city, down to Pallet Town and is one reason why Ash initially embarks upon the journey: to escape the turmoil at home. But the whole organization, including Butch and Cassidy, is symbolic o his inability to escape his father's machinations.
James is implied homosexuality (which does not necessarily make Ash homosexual) and gullibility, and Jesse is vanity and manipulation. Since Meowth has the potential for rehabilitation, and doesn't want to be evil, this once again fits in with the conflicting personalities and demonized-self theory. Team Rocket cross-dresses because Ash is exploring his sexuality (a different facet than what Brock represents) and this was a method that allowed his gay/vain side to experiment freely. When he found that it wasn't something for him, his "free" side stopped playing with it.
Max came with May. He played the Ego and she played the Id with great aspirations in that "session". They worked for a little while, but with Ash being a teenager, his sexuality had to come back into play. He kept reinventing himself and eventually wrote new aspects, but his mind slowly brought the old ones back as a crutch to make the transition easier.
Dawn is Ash giving himself a chance to love. Since he already established Misty as someone he's not likely to go anywhere with, he created a new super female, one that was more like him, and less violent. You may note that while both May and Misty had no tolerance for Brock, Dawn seems to try to shrug it off.
Tracey, the Breeder, was a possible future for Ash that he discarded. This future was one that he sent off to work with the professor (Ash's ultimate ideal of a father figure) when Tracey disrupted the dynamic Ash had with his other possibilities. With Ash's mind fighting the coma and Ash viewing this person as a companion, Tracey was quickly replaced with a more threatening rival.
Pikachu represents Ash's humanity, hence the episodes where they get separated and Ash wants desperately to find him, even to the point of working with the Rockets (aspects of himself he would never normally associate with) but for some reason cannot. Team Rocket want to steal Pikachu and hand him over to Giovanni. Jesse and James will always oppose Ash because Ash is terrified of the thought of his humanity lying in the hands of his father. However, this is the same reason that he will work with those aspects of himself in order to save his humanity from just becoming flat out lost. Ash couldn't evolve Pikachu because that would mean challenging his concept of who he was, which was something he wasn't comfortable with while still working through his original issues.
The narrator is Ash's higher mind, recapping and explaining the progress he's made and the tribulations he will face, allowing itself insight into how best to awaken him.
Team Rocket's methods gradually become more and more ludicrous because Ash is only a child dreaming these things up. That is why Team Rocket's disguises are always believed. He knows it's them (at least on a subconscious level), but chooses to ignore it so that he can better himself. In a sense, the Ash who wants to escape is sabotaging the Ash who wants to stay lost in his mind so that there can be more conflict, and hopefully an eventual escape. The escape being a consequence of coming to terms with who he is, as, mentioned previously, Team Rocket are a method for Ash to deal with grounds he's uncomfortable with tackling on his own.
You may recall that early in the show there were animals and references to animals. For example, the fish in the aquarium of the Cerulean city gym, or that the Pokedex lists Pikachu as "rat-like". These animals don't matter to Ash's psyche so they don't come into play much. If Ash had loved puppies, everything would be about different breeds of dogs, and a dog fighting circuit, but as the series goes on, you see fewer realistic animals and more Pokemon. This could be a sign of Ash's mind deteriorating. As he's in the coma, he's losing concepts of some animals and machinery and replacing them with Pokemon. It could explain things like electric Pokemon working as power generators; these are signs that his memory of the old world is slipping more and more as time goes by. The Pokemon realm will be idealized continuously the longer he has no stimulus from the real world. Ash may or may not be mentally deteriorating, but he is becoming more accustomed to his fake world's rules. The wild Pokemon are his rationalizations for the functioning of his created fantasy. It's the "a wizard did it" syndrome. If he doesn't know how it works, his mind says Pokemon.
The Pokemon in Ash's team, however, serve the purpose of displaying his issues and aspects of himself. For example, Charmander represents his sex drive (not his sexuality, like Brock). At first it's a cute, easy thing to control, but eventually becomes a raging inferno of disobedience since Ash has no real understanding of his sexuality and thus has no way to vent or keep it in check. Bulbasaur was his unwillingness to change, reflected in when it declines to evolve and almost decided o stay behind unless he battled it. Squirtle was his willingness to follow the lead of others, as evidenced by the gang it ran with, even though he ran the gang, they were viewed as one group, and Ash's subconscious just gave him the strongest one. Butterfree was his crushing loneliness, which he dealt with when he released it to join a flock. His bird types are his recklessness, always willing to sacrifice something at a moment's notice for the win. When Ash is trading Pokemon, it's an attempt to push his own problems away on someone else; however, he realizes this and usually trades back fairly quickly.
Not only are Ash's Pokemon a manifestation of different parts of himself, the Pokemon of other trainers are as well. Koffing and Ekans were symbolic of Team Rocket's willingness to change, hence their evolutions. Once his mind was able to overcome that roadblock and allow them to change once, it gave him the chance to truly change.
An interesting note is that Pupitar is a rationalization: a Pokemon that a rival caught before he met him. Even Ash would become suspicious if everyone he met had no carry-over from previous places he had been to.
Other trainers are more direct forms of his issues -- ones that he must either come to terms with or outright suppress. Gym Leaders are more primary aspects of his personality, with each Pokemon being stronger than the last, to display a level of skill he could be capable of if only he gave into it. In effect, he is doing battle with a part of him that he would rather not have in control. Originally, Ash had the battles, which evolved into team battles and contests. The explanation for this is that his issues became more and more complicated, and the means of dealing with them needed to become more complex. The fact that he uses issues that he has already dominated to win these are signs that he's growing stronger.
Ash releases his Pokemon because his mind is forcing him to let go of them. The second he raises an overpowered team, a tournament comes up, and after fighting his way through it he has to go to a new land for new challenges. But with an overpowered team, there won't be any challenges, and no way to motivate him further, so the part of Ash that wants to stay in the coma and keep journeying releases his solved issues so that he can continue and overcome the unresolved ones. This is essentially his mind forcing him to deal with his issues.
Ash's rivals and the Elite Four are ultimately the strongest part of this cycle. Having Pokemon that are essentially godlike, they represent both what can be attained and what is unattainable. Ash's rivals are all possible future he envisions for himself (note that they are all older than him). This originated with Oak, someone Ash knew from real life and built up into a sort of god within his mind, but Oak progressed and changed to suit Ash's vision of himself and his ultimate desire, eventually settling down into a professor role after beating the Elite Four. With Gary Oak in retirement, his mind needed a new rival for him, thus the births of Richie (the good aspect of his rivalry) and Paul.
Paul is his mind's last ditch efforts to snap him out of this, to force Ash to actually come to terms that this perfect world is not the best option or path to waking up. Paul is Ash's shadow, one that wants to push on even harder and harder, and the part of him that will stop at nothing to escape this coma world.
Mewtwo is a new form of treatment, done with electric impulses and a machine to knock Ash out of it, taking down every last one of his mental guards (the original Pokemon in the movie). In Ash's mind, Mewtwo and his clones were (in the real world) the treatment for the mental safeguards that were protecting Ash and keeping him comatose: the Pokemon of his world. The clones were counters to the issues that Ash had thought solved, and so each appeared to Ash as the exact copy of his defense. The clones didn't play by the rules of Ash's world, they didn't use any special Pokemon attacks or moves -- they just beat down their counterpart through brute strength. The treatment was working.
There were side effects. The electric jolts were beginning to affect Ash's nervous system, and if the treatment continued, he would be paralyzed. His mind manifested this in the dreamworld by petrifying him. Were it not for the end of the treatment by Ash's mother (who knew her son wouldn't want to live in a world he couldn't explore), Ash would have remained as stone forever. After this, Ash needed to recover from the damage caused by the electric therapy. In order to reduce the danger Ash's consciousness felt from it, his subconscious began downplaying the effects of electricity in his world, which is why Pikachu's electric attacks -- once noted for their strength by Team Rocket -- no longer have any effect on Ash, other than comic relief.
As we can see, Ash may well have been trapped forever in this world. But like every dream, like everything, there is a beginning and an end. What would happen if Ash never recovered? In his hospital room, we see Delia, obviously distraught, talking to a doctor with a grim look on his face. He's saying that their insurance is up, and the boy has had no change in brain activity for seven years. That the shock of taking him off life support has a very small chance of awakening him.
She tearfully agrees.
Back in Ash's world, he has finally defeated the Elite Four, and one by one, the people around him start disappearing. Eventually, everything is black. Pikachu comes dashing towards him, glowing brighter and brighter in the darkness. Eventually he reaches Ash and the two embrace one last time.
Back in the hospital room, his life signs fading, Ash mutters his final words.
I...want to be...the very...best...
He will die, never having known his dream, except as naught but a dream. When he came back to reality, he knew it all for the lie it was, knew it as his imagination. Knowing that his efforts, ambitions and friends were nothing, he will let go.
As he utters his final phrase, he barely opens his eyes and sees the silhouette of his mother, her face hidden by her hands wiping away tears. They make eye contact, and one final realization fills him before he loses all strength.
He sees that his mother was holding out hope that he'd recover all that time. He sees her and finds that her hope had been broken as she'd come to the realization that she'd outlived her only child. He dies knowing that he is loved, but that it means the one person closest and most real to him is utterly crushed.