We analyze the achievable rate in interferencefree wireless networks with physical layer fading channels and orthogonal multiple access. As a starting point, the point-to-point channel is considered. We find the optimal physical and network layer rate trade-off which maximizes the achievable overall rate for both a fixed rate transmission scheme and an improved scheme based on multiple virtual users and superposition coding. These initial results are extended to the network setting, where, based on a cut-set form ulation, the achievable rate at each node and its upper bound are derived. We propose a distributed optimization algorithm which allows to jointly determine the maxim um achievable rate, the optimal physical layer rates on each network link, and an opportunistic back-pressure-type routing strategy on the network layer. This inherently ju.stifies the layered architecture in existing wireless networks. Finally, we show that the proposed layered optimization approach can achieve almost all of the ergodic network capacity in high SNR.