In Craig's essay “'Men Moved By the Holy Spirit Spoke From God' (2 Peter 1.21):A Middle Knowledge Perspective on Biblical Inspiration,” we see his Molinist middle-knowledge views in practical application.
The question Craig responds to is: “How can one hold to the verbal inspiration of the whole of Scripture without lapsing into a dictation theory of inspiration which, in effect, extinguishes the human author? A theory of divine inspiration based upon God's middle knowledge is proposed, according to which God knew what the authors of Scripture would freely write when placed in certain circumstances. By arranging for the authors of Scripture to be in the appropriate circumstances, God can achieve a Scripture which is a product of human authors and also is His Word.”
Now let me explain. God has “counterfactual knowledge.” This is different from “simple foreknowledge.” Counterfactual knowledge “involves His knowledge of what some creature would freely do, were he to be placed in a specific set of circumstances.”
It’s like this. Suppose John is faced with situation X. To do X would be good, but to not do X would be evil. We can state this as follows: If John is faced with X, then John will either choose X (which is good) or not choose X (which is evil). Now if God knows what John will choose if John faces X, then such knowledge is “middle” knowledge, or counterfactual knowledge. God has knowledge of hypothetical “if-then” situations.
Such knowledge is not knowledge of necessary truths, which God has, nor is it knowledge of actual truths.
Now consider this. “If John is presented with the gospel of Jesus Christ, then John will either embrace the gospel or he will not embrace the gospel.” God, having middle knowledge, knows what John will choose in such a situation. If, when faced with this situation, John chooses not to embrace the gospel, then God cannot create any possible world in which John is presented with the gospel and freely chooses to embrace it, because this would violate John’s free will. God will not be unjust, then, if God creates a world where John never is presented with the gospel. This is because God, having middle (counterfactual) knowledge, knows that if John is presented with the gospel John will freely reject it.
Now try this. God knows what Matthew (author of the first gospel) would freely choose to write if Matthew is placed in situation X. God then can create a world where Matthew in placed in those situations where he freely chooses to write what God would want him to write. It therefore follows that “God can achieve a Scripture which is a product of human authors and also is His Word.” A Molinist middle-knowledge position allows us to conclude that both the sovereignty of God and human free will are maintained.
But does God have middle knowledge? The Christian viewpoint affirms this. Matthew 11:23 reads: "And you, Capernaum, will you be exalted to heaven? You will be brought down to Hades. For if the mighty works done in you had been done in Sodom, [then] it would have remained until this day." God, having knowledge of counferfactuals, knows how the people of Sodom would have responded had they been in the presence of the mighty works Jesus is doing. Thus Scripture affirms that God, indeed, does have middle knowledge.
See Bill Craig's essay "ON BEHALF OF A MOLINIST VIEW OF PROVIDENCE," in William Lane Craig, Greg Boyd, et. al., Four Views on Divine Providence (Counterpoints: Bible and Theology) .